Why are 10% of people renouncing their inheritance in Spain? Set up an effective estate plan to protect your heirs from succession tax.
10% of all inheritances in Spain were renounced last year, with the number of people choosing not to accept their inheritance reaching the record figure of 38,791 in 2016. In 2007 it was 11,048.
The two main reasons are the debts inherited along with the assets, and high levels of Spanish succession tax payable by the inheritors.
Spanish succession and gift tax is calculated on and paid by each recipient. It is due where the recipient is resident in Spain, or if any asset being inherited or gifted is a Spanish asset.
Under state rules the applicable rates range from 7.65% to 34%, and tax free personal reductions vary from €15,957 for descendants, ascendants and spouses, to €7,993 for siblings, nephews and nieces, in-laws, step-children etc, to nil for everyone else. Multipliers can take the tax rate higher potentially up to 82%, though this is in extreme cases only.
The autonomous communities are allowed to amend the rates, allowances and rules in their area, and some regions have higher tax burdens than others. It is important to be clear on whether local or state rules will apply to your heirs, and keep up-to-date on your local rules as they can change from one year to the next.
The region with the highest percentage of rejections in 2016 was Asturias with 16% and the lowest Aragón with 7%. Baleares had the third highest percentage with 13.4% (1,284 people renounced their inheritance compared to 335 in 2007). Andalucía was just behind with 13.1% (7,081 compared to 1,417 in 2007). Murcia was fifth with 12.5% (1,080 compared to 208 in 2007), Canarias was seventh with 10.6% (1,445 compared to 338 in 2007), Cataluña eighth with 10.4% (7,766 compared to 2,487 in 2007) and Comunidad Valenciana 11th with 8.7% (3,609 compared to 851 in 2007).
Spanish succession tax must be paid within six months of the date of death. This does not leave much time for your heirs to sort out the paperwork and find the funds to pay the due tax.
When calculating the tax liability, debts such as mortgages are deductible from the amount inherited. However, the recipient also inherits the debt associated with the asset and is responsible for paying it off, as well as the succession tax bill on the balance. The downturn in the Spanish property market has resulted in more people inheriting property with negative equity.
It is possible to accept an asset without having to pay creditors any more than its value. This is if you accept the inheritance ‘a beneficio de inventario’.
You can opt to renounce an inheritance in Spain, and so avoid taking on the debt, but you have to renounce the whole inheritance. This needs to be done through a public notary and is irrevocable.
If you simply renounce the inheritance, you are not liable to the succession tax that would have been due.
But if you renounce it in favour of another person two tax liabilities arise – you still need to pay succession tax, and whoever you pass it to has to pay gift tax. So let’s say you leave a Spanish property equally to your two children, John and Mary. John is financially better off and decides to renounce his inheritance in favour of Mary. John will pay succession tax on his half, while Mary will pay succession tax on her half, plus gift tax on the amount she receives from John.
This is an example of a very expensive tax mistake that can easily be avoided. It is so important to have a carefully structured estate plan, based on a thorough understanding of the Spanish succession regime and how it interacts with the UK one. You may want to talk to your heirs in advance, to establish who would benefit most from your assets. For example, adult children who are comfortably off may prefer you to pass wealth directly to their children.
Structure your assets to remove debt where possible, and take steps to lower succession tax for your heirs using compliant arrangements. There are more opportunities to mitigate tax on investment capital than on property, and some people opt to downsize in their later years, or sell and move into rental property, so they can invest the funds in tax-efficient structures.
Your family is unique, so your estate plan should be designed specifically for you. Wills, succession law and inheritance taxes are all complex areas, so you need specialist, cross-border advice. Your adviser should take the time to get to know you and your aims, so you have peace of mind that the inheritance process will be as simple as possible for your heirs and they will be well supported.
Any questions? Ask our advisers for help.
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.