Spanish Succession Tax
August 14th, 2006
Spanish succession tax applies to inheritances and gifts reports Bill Blevins, Financial correspondent of Blevins Franks. It is payable if the recipient is a Spanish resident or the assets in question are located in Spain. The residency of the donor does not matter except to indicate whether it is State (national) or Regional rules that apply.
There is no blanket exemption for assets passing between spouses as there is in the UK. Only the Spanish assets of non-residents are liable for tax, but if the beneficiary is a Spanish resident, they will be liable for succession tax on any worldwide assets they inherit. Beneficiaries are graded into four groups and the more distant the relationship the higher the tax rate and the lower the tax free allowance:
Group I: natural and adopted children under 21
Group II: natural and adopted children aged 21 and over; grandchildren etc; parents; grandparents etc; spouses; unmarried partners registered as a pareja de hecho in Andalucía or Catalunya.
Group III: in-laws and their ascendants or descendants; stepchildren; cousins; nieces and nephews; aunts and uncles; sisters and brothers.
Group IV: All others including unmarried partners unless registered under pareja de hecho.
The tax rates for 2007 range from 7.65% for assets of €7,993 or less, to 34% for assets over €797,555. Once you have worked out the tax due it has to be multiplied by factor of between 1 and 2.4 depending on the relationship and existing Spanish wealth of the beneficiary.
There is a reduction of 15,956 euros per beneficiary in Groups I and II. Any direct line descendant under the age of 21, including adopted children, has an additional allowance of 3,990 euros for every year they are under 21. The total deduction is limited to 47,858.59 euros per child etc. Those who are not so closely related such as cousins, nephews, nieces and stepchildren have an exemption of 7,993 euros each.
Where the recipient is disabled, further reductions are available depending on the degree of registered disability. Between 33% and 65% disability it is 47,858 euros, and for over 65% disability it is 150,253 euros.
There is no exemption for distant relatives and unrelated people. There are also no exempt limits for lifetime gifts.
Under the State rules, a 95% reduction is allowed against the value of the deceased’s main home provided that the beneficiaries are either the spouse, parents or children and the inheritors continue to own the property for ten years from the date of death. The property does not have to be the main home of the beneficiary. The maximum reduction is 122,606 euros for each inheritor.
The 95% exemption can also apply where the beneficiary is a more distant relative over the age of 65, and they have lived with the deceased for at least two years before the death.
Spanish succession tax is ultimately governed by the various Autonomous Communities which are individually controlled politically. The Autonomous Communities have power to improve upon the State rules. There is a gathering trend towards relief or abolition of succession tax between spouses and the direct line in the Autonomous Communities.
In Tenerife the personal reductions are the same as the State except for relief on the main home which is 99%. There is an additional deduction of 72,000 euros for recipients with a disability of between 33% and 65%. For a recipient with a disability of 65% or more it is 225,000 euros.
A 99% reduction is in place for life assurance policies provided that the recipient is a descendant under 21 years.
An 85% deduction is allowed for cash gifts to descendants under 30 years old to buy their main home up to a maximum of 24,040 euros. For recipients with a disability of 33% there is a reduction of 90% up to 25,242 euros. If the disability is 65% the reduction is 95% up to 26,444 euros. The gift must be registered as such and the property must be bought within six months of the gift (or the first gift if a series of gifts is made). The property must be situated in the Canaries and the recipient must live in the property as his or her main home for at least five years.
Even though you are a resident of Spain you may still be UK domiciled and will be liable for UK inheritance tax (IHT) on your worldwide estate, which will include your Spanish assets, as well as being liable for Spanish succession tax. IHT is at the rate of 40% above the tax free band of £285,000 rising to £300,000 from April this year, although any tax paid in Spain can be deducted against the UK tax due.
There are structures available, such as offshore trusts, which can protect against the liability to Spanish succession tax, as well as wealth, income and capital gains taxes. Spanish succession laws cannot apply either to assets in an offshore trust. Once you have lived in Spain for at least three years and if you succeed in becoming a UK non-domicile you can set up a ‘Golden Trust’. This is an offshore discretionary trust with permanent exemption from UK IHT even if, unplanned, you eventually return to the UK to live.
