The decentralised system of government in Spain means the regions are generally able to set their own rules, rates and exemptions when it comes to taxation of individuals – inciting claims of ‘tax dumping’ between regions. Recent steps by one region, however, could eliminate succession tax for around 95% of locals, increasing its appeal as a destination for wealthy British expatriates.
The situation seen in Catalonia earlier this month has perhaps brought Spain’s regional system of governance into sharper focus.
Spain operates a decentralised form of government, although it is not technically a federation as in the USA. While ultimate sovereignty lies with central government, the Spanish constitution of 1978 devolved certain powers to seventeen autonomous communities and two autonomous cities. This enables each region to self-govern in varying degrees in areas such as local infrastructure, education, social welfare – and taxation.
The call for tax harmonisation
How this manifests itself in terms of the Spanish tax regime is interesting, and the disparities – particularly around succession and gift tax and wealth tax – can be extreme. So much so, that in January’s meeting of regional Prime Ministers and Spanish Prime Minister Mariano Rajoy, Andalucía requested a ‘tax harmonisation’ of the Spanish tax system. Focusing on succession and gift tax and wealth tax, they claimed that the current system enables unfair competition and tax dumping between the different Spanish regions.
Other regions such as Comunidad Valenciana, Murcia, Castilla-La Mancha, Castilla y León, Galicia, Extremadura, Cantabria and Aragón requested a maximum and minimum rate for succession and gift tax and wealth tax. One region that opposed this was Madrid, which currently allows exemptions of up to 99% when it comes to succession and gift taxes – if certain requirements are met.
The central and regional Spanish governments appointed a tax experts committee to look into the issue, and their recommendations were published in August.
Succession and gift taxes
For succession and gift taxes, they proposed establishing a fixed value that is exempt from succession and gift taxes, and rates of 4%-5% for inheritances and lifetime gifts between close relatives, with 10%-11% for others. They also suggested simplifying the calculations by removing the multiplying factors that depend on the pre-existing wealth of beneficiaries and the relationship between the donor and the recipient.
Despite speculation, there is no suggestion to abolish wealth tax. However, the committee recommended that the same personal allowance is applied across all Spanish regions. While no figure was specified, it is currently €700,000 in most regions. Regions will continue to be able to set their own rates and establish reliefs so that potentially no wealth tax could be payable at all – as is currently the case in Madrid.
The central and regional governments now need to decide whether to implement any of the recommendations, which is expected to take some time. But step forward Andalucía again, who decided to move quickly.
Changes lined up for Andalucía
An agreement has been reached recently between PSOE and Ciudadanos political parties to substantially reduce succession taxes in the region. This should result in all inheritances within Groups I and II beneficiaries (direct descendants, ascendants and spouses) of up to €1 million being exempt from succession tax in Andalucía (so long as the beneficiary’s pre-existing wealth is also under €1 million).
The same will apply for gift tax purposes, so gifts of up to €1 million within Groups I and II beneficiaries will be exempt from gift tax, provided that the gift is used to create businesses and employment in Andalucía.
However, the new €1 million threshold only applies to those who are eligible to benefit from the regional Andalusian rules. Whether the state or autonomous community rules apply can be complicated, depending on where the beneficiary and the donor are resident and where the assets inherited/gifted are located. Those who do not benefit from the regional rules will attract the state rules instead – meaning higher taxes payable and no exemption between close relatives. Specialist advice is recommended for expatriates to understand their situation.
In the past, Andalucía has been one of the most expensive regions for succession and gift tax purposes, but now the estimates are that this change would result in around 95% of people in the region not having to pay any succession tax.
These changes are expected to come into force on 1st January 2018, subject to the approval of the budget for this region. If implemented, in the majority of cases, spouses, children and parents will escape this unpopular tax completely, making Andalucía an even more attractive region for British expatriates.
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.