If you live in Mallora or Menorca, how will your wealth be passed down to your children, grandchildren and other chosen heirs? How will they handle your legacy? Will it help give them long-term financial security? How much will they actually receive, and how much will go to the taxman?

Many readers are enjoying their retirement years in the Balearics, whether living there full time or spending as much time there as they can, taking advantage of all the benefits the island has to offer. You are reaping the rewards of all your hard work advancing your career, perhaps building up and selling a business, and the effort you put into accumulating your savings, investments and pension funds. Some readers may have inherited capital, which has helped to provide them with the life they are enjoying here today.

Even if you have put a lot of thought into your wealth management in the past, there comes a time when we need to look at our financial planning again in terms of multi-generational wealth management.

How will your wealth be passed down to your children, grandchildren and any other chosen heirs? How will they handle your legacy? Will it help give them long-term financial security? Or will they spend it hastily and make decisions they will regret? How much will they actually receive, and how much will go to the taxman?

Complex family situations need particular consideration – for example, if you remarried and have children from previous marriages, or need to consider stepchildren. You may wish to establish a way to gift with certainty, where you still have some control over when your heirs receive their funds and how they use it.

Taxation is another essential component of estate planning.

Spanish succession and gift tax

If you live in Spain or if you have Spanish assets, then you need to plan to protect yourself and your heirs from Spanish succession and gift tax.

Succession tax is due when the assets being inherited or gifted are located in Spain (regardless of where the recipient lives), or if the recipient is resident in Spain (regardless of where the assets are).

Tax is paid by each recipient and spouses are not exempt. Allowances under the state rules are just €15,957 for spouses, descendants and ascendants, €7,993 for other close relatives and nil for everyone else. There is a 95% allowance against the main home (maximum €122,606 per inheritor) when inherited by a spouse or descendant, but only if they keep it for 10 years.

Under state rules, tax is applied at progressive rates from 7.65% to 34%. Multipliers, depending on the relationship and the recipient’s pre-existing net worth, mean the tax can rise to 82% in extreme cases.

Succession and gift tax is governed by both state and local autonomous community rules; each region has the right to amend the state rules.

In Islas Baleares, the allowance for spouses, descendants and ascendants increases to €25,000. They also only pay 1% tax on inheritances under €700,000. Above this the tax rate ranges from 8% to 20% (for inheritances over €3m). These special rates are for inheritances only, not gifts. Children under 21 have higher allowances and 99% reduction on inheritances.

The regional rules also increase the main home relief to 100%, maximum €180,000, with the same conditions as the state rules.

Whether the state or local autonomous community rules apply depends on where the beneficiary and the donor are resident and where the assets inherited/gifted are located.

UK inheritance tax

UK nationals are also faced with UK inheritance tax. Determined by domicile rather than residence, it continues to affect many British expatriates living here. For wealthier families, the tax bills can be considerable.

Tax planning

It is not just inheritance tax you need to think about. If you are leaving your heirs savings and investments, once they receive the funds they will start to pay tax on the income and gains. So you should think about how to hold your investment capital so that it is tax efficient for them. Also consider how these investments will pass on to chosen heirs – will it be a drawn out and costly process, or can ownership easily change hands?

Finally, do not forget your own needs. You may want the best for your heirs, but you also have to ensure you and your spouse continue to benefit from your wealth in the meantime.

Writing your ‘last will and testament’ is one key step in estate planning. You may need more than one to cover assets in different countries. But a will can only go so far. If you are looking to gift with control, and reduce taxation, you need to employ other arrangements as well.

Cross-border estate planning is complex, and needs to take multi-jurisdictional succession law, inheritance taxes and probate into account. There are compliant opportunities available in Spain that allow you do all this, and which provide significant tax advantages. This is a specialist area, so take professional, personalised advice to get it right.

The Blevins Franks Estate Planning Review Service

Blevins Franks offer an Estate Planning Review Service. We can provide a detailed written report analysing the tax and other implications of your existing estate plan and recommend any changes to ensure that your succession objectives are achieved and/or succession taxes are mitigated. Our personal, local service in Mallorca ensures that our advice is tailored to meet your specific requirements and that you enjoy an ongoing service. Please contact us for further details.

We have also produced a “My Legacy” document, to enable you to record relevant information so your family can easily access relevant contact information and documents, together with your personal wishes, at the most difficult of times. It is designed to be a single point of reference for your family so they readily know your immediate wishes and where to find important information. Please contact us if you would like a copy.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices, which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.