Spanish Inheritance Tax (ISD)

The most important statement in this article, and one commonly misunderstood is as follows;

‘The beneficial exceptions from the various Communities (AC), never apply to Spanish non-residents.’

This complex issue is often ‘swept under the carpet’ but eventually everyone is affected. In particular, the prospect of a widow(er) paying inheritance tax on the death of their spouse can come as an enormous shock.

·         There are State (National) rules and variations by the Autonomous Communities (AC)

·         State (National) rules always apply to non-residents

·         Autonomous Region rules will apply ONLY to Spanish residents

·         There is no Double Taxation Agreement on inheritance Tax between Spain and the UK

This subject will continue to remain high on my Agenda, as the vast majority of expats in Spain are affected. Non-resident property owners may not think they are affected – unfortunately they are! Please email me if you want clarification of your own position

Impuesto sobre Sucesiones y Donaciones (ISD) is also called Succession Tax or Inheritance Tax and is a tax on inheritance and gifts, paid by the recipient of the inheritance or gift. It is due only if the recipient is resident in Spain or the asset being inherited or gifted is an asset located in Spain such as real estate or moveable property situated in Spain. If the property is owned by a UK company ISD is not payable on the death of a shareholder of the company.

Allowances are available depending on the relationship with the deceased or donor. In the first instance the Spanish State rules apply but these can be varied by the different Autonomous Communities (ACs) providing conditions set by the relevant AC are met. The State rules always apply to non-residents owning assets in Spain.

There is currently no blanket exemption between a husband and wife under the State rules. Where a married couple are both residents in Spain and one spouse dies, the surviving spouse can be fully liable on the worldwide assets inherited from the deceased spouse, subject to the allowances and reliefs available.

The worldwide estate of British expatriates who are UK domiciles on death will also be liable to UK inheritance tax, as well as to Spanish succession tax on chargeable Spanish assets. Any succession tax paid in Spain can be deducted from any UK inheritance tax liability on the same asset. There is such a fundamental difference between the inheritance tax in the two countries that no double taxation agreement exists on this issue. Please email if you need referral to a professional advisor.

State Rules

Beneficiaries are divided into the following four groups depending on the closeness of relationship to the donor or the deceased:

• Group 1: Natural and adopted children and other descendants (such as grandchildren, great-grandchildren) under 21
• Group 2: Natural and adopted children and other descendants aged 21 and over; parents and other ascendants (such as grandparents, great-grandparents), and spouses
• Group 3: In-laws and their ascendants/descendants, step-children, brothers and sisters, cousins, nieces and nephews, aunts and uncles
• Group 4: All others including friends or unmarried partners

State Allowances

There are tax-free State allowances on inheritances (not life-time gifts) for members of the different groups as follows:

• Groups 1 and 2: €15,957
• Group 3: €7, 993
• Group 4: nil

Group 1 inheritors under the age of 21 can have an additional deduction of about €4,000 for each year they are under 21, restricted in total to €47,858 per recipient.

There are further reductions where the recipient is physically or mentally disabled depending on the recognised degree of disability.

Relief for main home

There is a 95% allowance against the inherited value of the main home of the deceased up to €122,600 per inheritor, provided that the beneficiary belongs to Group 1 or 2 or is a remoter relative over the age of 65 who lived with the deceased during the two years prior to their death. The property must be retained by the beneficiary for 10 years following the death, but it does not need to be the beneficiary's main home.

Succession tax rates vary from 7.65% to 34%. The tax liability is subject to multipliers based on the pre-existing wealth of the recipient, which can take the highest effective rate of tax to about 80%.

Gifts

Gifts made by the same donor to the same person within a period of three years, taken from the date each gift is made and on the value at the time it was made, are aggregated and treated as one transaction for gifts tax. To determine the tax rate applicable, the value of all previous gifts made to the same person within the last three years plus the current gift are added together. The average rate of tax on the theoretical total is then calculated and applied to the latest gift.

Autonomous Communities (AC)

The Autonomous Communities (ACs) can vary the State rules in the taxpayer's favour. The State allowances and reductions apply in the first instance provided that the relevant conditions have been fulfilled. Any enhancement to the State allowances and reductions granted by the AC will then replace the State deductions, again providing any additional conditions imposed by the AC are fulfilled.

Please note, however, In the case of real estate in Spain owned by a non-Spanish resident, the State rules will always apply on the death of the non-resident owner. The beneficial exceptions from the various Communities (AC), never apply to Spanish non-residents.

In some ACs, spouses and children can receive a 99% reduction in the inheritance tax payable on death. This reduction currently applies in the Canary Islands, Balearics, Murcia Region, Madrid, and Valencia Community.

In Andalucía, spouses and children are exempt from inheritance tax where the taxable value of the inheritance received is no more than €175,000, and the wealth of the recipient does not exceed €402,678.

In Cataluña, personal allowances increase significantly from 1 July 2011.

In many ACs, unmarried couples registered as a pareja de hecho are recognised as spouses.

It is important to look closely at the rules relating to a specific AC’s to obtain full details of the range of allowances and exemptions available. I can put you in contact with professional advisors in most regions, if you email

Succession tax is paid under the AC's rules if the deceased was habitually resident there, in the case of an inheritance; or, in the case of a gift of real estate, if the real estate is located in that AC; or, in the case of a gift of any other assets, in the AC where the recipient is habitually resident.

To be habitually resident in a particular AC, you must have been resident there for five continuous tax years. So, the deceased or donee (as the case may be) must have been continuously resident in an AC for the past five years for that particular AC's rules to apply, otherwise the State rules will apply.

Summary

These complex rules and arrangements indicate that careful planning is required. You can get an indication of how this affects you by clicking on the link on the right of the page ‘Check your Spanish Inheritance Tax liability’. Seeking the information does not constitute any commitment on your part.

You can feel free to email me on any of these issues.

This complex issue has been researched using information available on web pages, consulting contacts and the writers own knowledge. It cannot constitute advice and professional guidance maybe required.