If You Live in Spain or Own Spanish Property You Need to Plan for Spanish Succession Tax!

If you live in Spain, own a Spanish property or you expect to perhaps inherit Spanish assets from family or friends in the future, you could be in for an expensive surprise if you don’t have a clear understanding of the potential future Spanish Succession Tax (SST) liabilities which may arise from your ownership or your inheritance.

If you’re a British expat living in Spain, or a non-Spanish national who inherits or acquires property in Spain, it’s also important to understand how SST liability can impact upon, or operate in conjunction with, your liability for the likes of inheritance taxes in your country of origin as well.  Now, the word on the street (or more accurately, the word on expat forums) seems generally to follow the line of either: “don’t worry about SST, nobody pays it” or “SST is a nightmare and you’re going to be trapped and paying a fortune!”

However, we want to cut through the confusion and arm you with the right knowledge, because equipped with adequate understanding of this particular type of tax, it quickly becomes clear that neither of the above points of view are correct, and that actually you can manage Spanish Succession Tax fairly easily…

Liability for SST does indeed arise for many Brits who live in Spain, own Spanish property or who have friends or close relatives living in Spain who leave them assets or property in their will.  SST is a form of inheritance tax, and as most countries in the developed world have such a tax we shouldn’t be surprised to come across it in Spain!  The good news is, it is a tax that you can plan for with understanding – what’s more, there are often legal and legitimate opportunities for you to take steps to substantially mitigate any SST burden.

Note - planning ahead here is key!

In this article, the references made and stories told relate to British expatriates and their status - however, most of the key principles apply equally to owners of Spanish properties who herald from other countries too.

The General Principles That Apply to Spanish Succession Tax(SST)

• SST is payable on inheritance between spouses on the death of the first spouse (unlike in the UK, in relation to Inheritance Tax (IHT)).

• SST is charged on each individual beneficiary (unlike in the UK, where IHT is levied on the Estate).

• Individual SST tax-free allowances are not very generous, typically less that 16,000€ per inheritor.

• Unlike UK IHT, which is usually extremely straightforward to calculate, the amount of SST ultimately payable is influenced by a number of criteria.  These include: relationship between deceased and beneficiary; value of inheritance; age of beneficiary; pre-existing wealth of beneficiary; location of assets; class of assets; existence of mortgages; residential status of deceased and beneficiary; and how quickly the SST liability is settled.

• The percentage rate of SST (calculated by reference to the principles above) can range from just under 8% to well over 80% (but the latter is only in the most extreme of cases, specifically in the case of non-related, already wealthy beneficiaries of very large estates).  But still – losing 80% of your inheritance in tax even if you’re wealthy is not pleasant!

• To avoid interest and penalties, SST must be settled in full, prior to the expiry of the period of 6 months from the date of death.

• Generally, it is not possible to use inherited assets (or inherited property as security) in order to pay SST.  In other words, arrangements must be made for SST to be paid before a beneficiary has access to the inherited assets – which can make life very difficult if you do not have the funds to pay, and actually need the inheritance to enable you to pay!

• There is a Unilateral Relief Treaty in place between the UK and Spain.  This means that you should not have to pay tax twice (i.e. in the UK and in Spain) on the same inherited asset.  Thus the total (combined) tax payable is, in effect, equal to the higher of the two.  However unfortunately, this relief is only available as a credit against ‘equivalent’ taxes.  A spouse-to-spouse inheritance, for example, is exempt from UK IHT.  Therefore, relief is not available in the UK for any SST paid by a spouse by reason of inheriting Spanish assets from their deceased spouse.  There is also an argument which undermines the general effect of the Unilateral Relief Treaty, as IHT is chargeable on the Estate, whereas SST is levied on the individual beneficiary - so are they really equivalent taxes in any event?  A clear ruling on the point is awaited.

SST is a Reality That Can No Longer Be Ignored

Liability for SST so often still comes as a great shock to many expatriates - particularly for surviving spouses who are already reeling from the loss of their partner.  When they are suddenly faced with a large and unexpected tax demand, which they were never warned about when they bought their dream home in the sunshine, they can be left devastated.

Generally though, Spanish property owners are more aware of this area of taxation nowadays as word has spread through expat communities to warn about SST.  Also, there is more awareness generally that Spanish Succession Tax has to be taken very seriously in estate planning terms.  In the ‘old days,’ we are told that the accepted custom in Spain was significantly to under-declare property values, both at the time of sale/purchase and also in the context of inheritance.  In some cases, no declaration was made at all, with a view to completely evading the tax liability.

However, Hacienda (the Spanish Tax Authority), has seen taxation revenues plummet with the recent economic downturn, and the previous fiscal policy of ‘relaxing’ succession taxation seems to have juddered to a halt.  SST suddenly represents a very attractive stream of revenue for the authorities – and one they are not going to ‘allow’ people to ignore or avoid!

Furthermore, the increased powers of investigation of Hacienda such as the development of communication with other national tax authorities, and the sheer growth of investigative manpower and investment in technology that the government has made, also mean that most people now see that they have no option but to make the required tax declarations - and that declared values have to reflect reality.  So things really have changed in Spain from the days of back-handers to the authorities and operating within a black or grey economy – which means you have to understand your liability and plan for it.  Ignorance is not an excuse, and avoidance will not be tolerated!

Understanding How You Can Mitigate Your Tax Liability Legally

As awareness of the seriousness of the SST issue has grown, so too have the options which are available to well advised owners of Spanish properties to quite legally and legitimately reduce their potential liability to SST through intelligent advance estate planning.

One point which must be made absolutely clear is that each case is unique.  When dealing with dual (or multi) jurisdictional estate planning, it is essential that the specific circumstances of the case are analysed carefully to ensure that the tax saving tools and documentation employed operate as intended in both (or all) jurisdictions.  It is impossible to employ a ‘one size fits all’ approach to tax planning.  It is also quite wrong to assume that what achieves tax efficiency in one country automatically achieves the same result in another.  In other words, there is always the danger that what is seen as efficient tax planning in one country can have an adverse or counterbalancing effect in another…so you have to have personal and qualified advice covering your entire international status.

Furthermore, you should be aware that in determining residential status, the country (and even region) of residency can also have quite a significant impact on potential tax liability – just to make everything a little more complicated!

However, the good news is that with the benefit of appropriate dual qualified professional advice, there are estate planning structures and tools available (both within and outside of just wills), which can be employed in appropriate cases to mitigate SST exposure in relation to Spanish properties and assets.

In Conclusion

One thing is certain: once you have died there is nothing you can do - and very little your beneficiaries can legitimately do - to reduce SST liability!  Therefore, the time to consider the issue and to put tax efficient arrangements in place in respect of your Spanish assets is at the time of making a property investment; or at the very latest, when dealing with your wills and your estate planning issues.  It is not good enough or even fair to say: “I’ll worry about all that later.” 

Andrew Eastwood, Managing Director of Legal4Spain states that: “The sheer number of Spanish probate instructions we receive annually where, had specialist professional advice been obtained earlier by us, beneficiaries could have been spared devastatingly - and quite unnecessarily - large tax bills to settle, proves to us that more must be done to make expatriates and non-Spanish owners of assets in Spain aware that they need to get estate planning in place sooner rather than later.”

With thanks to Legal4Spain.com for their assistance in the preparation of this article.  If you would like further specific and professional advice about Spanish Succession Tax planning (or estate planning generally in relation to Spanish assets) visit their website http://www.legal4spain.com or contact the company via email .(JavaScript must be enabled to view this email address).