Spain?s Succession Tax considered discriminatory by European Commission

In Spain, inheritance and gift tax is governed by both the state and the Autonomous Communities. There are 17 Autonomous Communities in Spain, and each has the right to amend the state rul

In Spain, inheritance and gift tax is governed by both the state and the Autonomous Communities. There are 17 Autonomous Communities in Spain, and each has the right to amend the state rules, but only to make them more beneficial, not more punitive.

Over the past few years, several Autonomous Communities (in particular those governed by the Partido Popular) have made significant reforms to their inheritance tax rules. In these Communities, there has been a general trend towards substantial reliefs and increased allowances, resulting in almost total exemption from inheritance tax in certain cases. For example, in Murcia, Islas Baleares, Islas Canarias, Castilla y Le?, Madrid and Comunidad Valenciana up to 99% of the deceased?s assets can be exempt from Spanish inheritance tax where the beneficiaries are children and/or a spouse. Andaluc? has also reformed its rules, where inheritances of up to ?175,000 passing to a spouse or children can be tax free.

Such generous exemptions are in stark contrast to the state rules, where the allowances are very much reduced. For example, under the state rules, the general allowance is only ?16,000 for inheriting spouses or children.

The system is complex, since the rules within each Autonomous Community vary, and different allowances and different rates can apply. However, one thing is certain: for the rules of a particular Autonomous Community to apply, the deceased must have been habitually resident there for the preceding five years. If the deceased does not meet this condition, then the state rules apply by default.

Currently, non-residents cannot take advantage of the favourable Community rules, since they will fail the habitual residence condition. So, for example, individuals not resident in Spain who have holiday homes or investment properties in Spain are most affected. Even though the property may be situated in a Community with favourable inheritance tax rules, these rules are of no benefit. As a consequence, higher taxes will be payable than if the individual had been living in Spain.

The European Commission first sent Spain a ?reasoned opinion? about these discriminatory rules on 5th May 2010. Whilst Spain tweaked its laws, they are still not fully compliant with EU law. The Commission therefore sent a ?complementary reasoned opinion? to Spain, stating that Spain?s inheritance and gift tax rules are in breach of the EU Treaty?s rules on the free movement of workers and capital. Spain has two months to respond. If no satisfactory response is received within this timeframe, the Commission may decide to refer the case to the European Court of Justice.

It remains to be seen how Spain will respond, and whether it will change its inheritance tax laws so that they no longer discriminate between residents and non-residents.

Whilst you may end up paying less tax in Spain in relation to your Spanish assets if Spain changes its laws, if you are not resident in Spain you will need to consider the inheritance tax implications in your country of residence, since you may still have a liability to inheritance tax in that country.

For example, if you are resident and domiciled in the UK and you own a holiday home in Spain, the property may be exempt from UK inheritance tax if it passes to a spouse, or if your total assets are below the UK Nil Rate Band of ?325,000. In these instances, the Spanish inheritance tax payable under current laws represents a true cost that cannot be offset against any future UK inheritance tax on that property.

If, however, the beneficiary is not your spouse, and your total estate exceeds ?325,000, then the Spanish tax can be offset against the UK inheritance tax liability on your Spanish property. In this instance, mitigation of the Spanish taxes may be academic since you will still have the UK tax to pay.

When considering inheritance tax planning, you should seek advice from Blevins Franks who specialise in Spanish and UK tax planning and have expert knowledge of the systems of both countries.

By David Franks, Chief Executive, Blevins Franks

28th March 2011

The 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 must take personalised advice.