OVERVIEW: Spanish Inheritance Tax Considerations for Brexpats
With Brexit underway, UK residents who own property in Spain – there are many of them, given that Spain is one of the main overseas destinations where Britons own second homes – must make an effort concerted to understand the changing landscape affecting how their offshore assets will be taxed as they wish.
Inheritance law in Spain
Inheritance law changed in Spain on August 17, 2015, when the new EU Inheritance Regulation 650/2012 (also known as “Brussels IV”) came into force. This new regulation aimed to improve and simplify international rules on inheritance and the way individuals are taxed on the assets they hold in EU member states. Essentially, the new regulations recognize that a person may change their habitual residence over time, so in cases where it is unclear what their habitual residence is at the time of death, the regulations provide the person the certainty of being able to choose the national law applicable to his will.
It is important to note that a will drawn up in Spain must be signed by a notary and submitted to the Central Registry of Wills. Therefore, when writing a will in Spain, it is important to ensure that the wording is clear to avoid what is known as the “rule of forced inheritance”, as there is no no testamentary freedom in Spain.
In this regard, it is important to ensure that the individual’s solicitor carefully drafts the appropriate clause in the will to choose English law as the law applicable to the succession, as there is no other way avoid this “rule”. If the “rule of forced inheritance” applies, the estate is divided into three parts and only one is freely available to the testator. In cases where there is no will in place, the Spanish intestate rules will apply, which means that the children will inherit all the assets.
Therefore, the law that the testator chooses to apply carries significant weight, although it is important to bear in mind that this decision does not apply to the jurisdiction of the court. While a court belonging to a Member State whose chosen law was decided by the deceased may have jurisdiction in certain eventualities (and in certain cases it may have exclusive jurisdiction over all questions relating to the succession), if a consensus is agreed between the parties in the event of a dispute over a testamentary question, the same court may decline jurisdiction in accordance with the law applicable to the nationality of the deceased or the location of the assets. In the UK, the only body that can issue representation grants is the High Court, so this is particularly important in that country.
The new regulations, which affect all aspects of inheritance and wills, have been largely ignored by British nationals who own property in Spain because the UK has opted out of the legislation. The importance of these new rules cannot be underestimated, as any will made before the 2015 date must be updated to comply with their provisions for all assets located in Spain.
Whether you have a single English Will or two separate Wills (one in England and one in Spain) should be carefully reconsidered in any state and tax planning exercise. Failure to revise or restate a will could have negative consequences on how assets are distributed or even how the individual’s assets will be taxed, which could become problematic.
Practical tax implications
With this in mind, what are the practical tax implications that the new rules and Brexit have on cross-border estate administration?
One of the first things to bear in mind regarding the tax situation is that Inheritance Tax (IHT) is not included in the double taxation agreement between Spain and the United Kingdom. . This means that any UK IHT planning should be considered alongside Spanish inheritance and gift tax (ISD) – which is an acquisition tax, as opposed to a transfer tax like in the UK – when writing a will. The heirs (or beneficiaries of a gift) have the obligation to pay the ISD if they have acquired real estate located in Spain by inheritance or by gift.
For tax planning purposes, the position of the beneficiary of the assets should be considered (rather than the position of the transferor’s estate). This is an important consideration when looking at the UK, where many families may use testamentary trusts or similar arrangements.
As mentioned above, those with a separate Spanish will, under the new regulations, can choose to apply English law (although this should be considered in conjunction with applicable UK probate rules). This is especially important when it comes to taxes. The UK domiciled and resident individual will be liable to UK tax on their property in Spain (as it forms part of their worldwide assets).
However, we must take into account that the UK resident in Spain will pay tax on their worldwide assets in both countries, although the UK may apply unilateral tax relief. In all cases, whether the deceased resided in Spain or elsewhere, the beneficiaries will find that they are liable for tax on all the assets and property they hold in Spain.
Please note that it is not the estate that will be taxed, but the beneficiaries of the estate. This is not a minor difference between the UK and Spain, and it is important to ensure that it is duly taken into account. It should be emphasized that even if the deceased is in the UK and there are no assets in Spain, successors living in Spain will be taxed according to the rules of the region of residence for assets inherited outside from Spain.
With so many British nationals living permanently in Spain (estimated at around 400,000), if the deceased is a Spanish resident, heirs are taxed according to the regional regulations corresponding to the residence of the deceased. If the deceased does not reside in Spain, the different assets will be valued jointly and the regional rules where the majority of the value of the assets is located will apply.
Under the new regulations, traditional tax planning schemes must also be reconsidered, for example, if the individual holds property through an offshore trust or holding company, or if testamentary trusts are instrumented or charities are involved. Applicable tax allowances are very limited for charitable donations.
Similarly, spouses are far from being exempt beneficiaries. Spouses and certain other families may be subject to specific tax obligations, although the rules depend on the Spanish territory in which the assets or beneficiaries of the assets are located. Lifetime donations are also subject to tax, which makes cross tax planning quite difficult.
The complications of the tax system in Spain are due to the fact that there are 17 regions with their own tax regimes for IHT (Comunidades Autonomas). There are 100% tax exemptions in Cantabria, 99.9% in the Canary Islands and 99% in Extremadura, Madrid or Murcia. In Andalucia there are generous allowances and similarly in Catalonia, Valencia and the Balearic Islands, which apply an allowance with certain limits to the tax payable. The calculations for each region should be thoroughly reviewed and analyzed.
After the death, the executor has six months to communicate with the Spanish tax authorities (State Agency of Tributary Administration (AEAT)), on which non-residents will need to provide a Spanish tax reference number (Extranjero identification number (NIA)). They must appoint a Spanish tax representative (Tax representative) to ensure that the process is managed efficiently. It should be noted that advice should be sought from a qualified tax advisor and lawyer in both jurisdictions, given the complexity of the process.
Leon Fernando Del Canto is an international tax lawyer practicing at Normanton Chambers in London. He is a member of the Honorable Society of Lincoln’s Inn, the Worshipful Company of Tax Advisers, the Association of Tax Technicians and the Bar of Madrid.
The author can be contacted at: [email protected]
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.