If you live in the Balearic Islands, then the chances are that your heirs, or perhaps yourself, will be hit by Spanish succession and gift tax. You need to understand how it will affect you and your family. The local Islas Baleares government made some changes to this tax from January 2016.
If you live in the Balearic Islands, then the chances are that your heirs, or perhaps yourself, will be hit by Spanish succession and gift tax. You need to understand how this tax will affect you and your family, and what steps you can take now to mitigate the impact.
While the Spanish government did not introduce many succession and gift tax changes for 2016, the local Islas Baleares government has made some changes. These changes are not retrospective, so they apply to deaths and gifts from 1st January 2016 onwards.
Spanish succession and gift tax basics
Spanish succession tax (Impuesto sobre Sucesiones y Donaciones) is due on death if the asset being inherited is located in Spain (regardless of where the recipient is resident), or if the recipient is resident in Spain (regardless of where the assets received are located). The same rules apply for gifts.
So if you leave your Spanish property to children who live in another country, they will have to pay Spanish succession tax on it. Also, if you receive an inheritance from your parents in the UK and you are Spanish resident, you are liable to succession tax in Spain.
The tax is paid by each recipient, not by the estate, and the amount depends on the relationship between the person passing the money and the recipient, the pre-existing wealth of the beneficiary and the total amount received. There is no blanket spouse-to-spouse exemption and it also applies to pension funds. So if you leave a UK pension fund to your spouse who is a Spanish tax resident, they will pay tax on it.
If you leave assets to your spouse, who then passes them on to your children when he/she dies, succession tax will be due again on the second death.
Note that the new EU succession regulation (‘Brussels IV’) that came into effect in August 2015 only relates to succession law, and not to succession tax. So foreigners can use their will to opt for succession law of their country of nationality to apply to your estate on death, but you cannot opt out of Spanish succession tax.
What you pay
According to Spanish state rules, tax is applied at progressive rates, ranging from 0% to 34%. There are also multipliers applicable depending on the beneficiary’s relationship to you and their net worth, which can take tax much higher – up to 82% in some extreme circumstances.
Under state rules, descendants, ascendants and spouses (Group I and II beneficiaries) receive an allowance of €15,956. Relatives like siblings, cousins, nephew and nieces, etc. (Group III beneficiaries) receive €7,993. Anyone else (Group IV) does not receive an allowance. An additional allowance is available for descendants under 21 years old.
There is a 95% allowance against the inherited value of the main home of the deceased, but only if the recipient is a spouse, descendant or ascendant and they keep the property for 10 years. Even then there is a maximum deduction of €122,606 per inheritor.
Currently, in Islas Baleares (as well as Cataluña, Andalucía and Islas Canarias) unmarried couples registered as ‘pareja de hecho’ benefit from the same reliefs as spouses. In other regions they are treated as unrelated (Group IV) so tax can work out much higher.
While the Spanish government sets state succession tax rates, allowances, deductions and exemptions nationally, the autonomous communities (the regions or ‘ACs’) have the power to vary these, usually in the taxpayer’s favour.
Whether the state or local autonomous community rules apply for each case depends on where the beneficiary and the donor are resident and where the assets inherited/gifted are located. Application rules can be complex and you should seek professional advice.
Islas Baleares regional rules
Under the regional rules of the Balearics, the allowance for Group I and II beneficiaries increases to €25,000. Children under 21 receive an extra €6,250 for each year under 21 (maximum €50,000). Group III beneficiaries receive €8,000 and Group IV €1,000.
The main home relief is 100%, up to a maximum of €180,000, with the same conditions as the state rules.
Under the regional rules, there used to be a 99% deduction for descendants, ascendants and spouses on taxable inheritances. The amount of this deduction was calculated by deducting from the discounted quota (cuota bonificada) the taxable base multiplied by 0.01.
However, as of 1st January 2016, the Islas Baleares government removed this regional allowance and replaced it with more beneficial progressive succession tax rates for Group I and II beneficiaries, as follows:
From €0 to €700,000 – 1%
From €700,000to €1,000,000 – 8%
From €1,000,000to €2,000,000 – 11%
From €2,000,000to €3,000,000 – 15%
From €3,000,000 onwards – 20%
Please note that these rates are only applicable for inheritances, not for gifts.
Children under 21 continue to receive the 99% reduction indicated above.
The tax bands and rates for inheritances and gifts for Group III and IV beneficiaries are largely the same as the state ones, they have just been rounded up. These rates also apply to gifts made to Group I and II beneficiaries. For these beneficiaries, there is a deduction available that effectively equates to a 7% tax charge on the amount of the gift in some cases (there are exceptions where the amount of the gift is low).
UK inheritance tax
UK nationals living here are likely to be liable to UK inheritance tax as well as Spanish succession tax. Inheritance tax is based on domicile, a much more permanent concept than residence, and losing your UK domicile status is difficult – but not impossible. You have to cut ties with the UK and consider Spain as your homeland. This is a specialist area and professional advice is essential.
Any Spanish tax paid on assets also taxable in the UK can be offset against the UK liability, so you do not pay tax twice, but you need to understand the interaction between the two regimes.
UK domiciled spouses living in Spain need to consider both the Spanish and UK inheritance tax liabilities. You need to consider what the best solutions are should the surviving spouse remain in Spain or return to the UK.
With specialist advice, many expatriates find they can use compliant arrangements to reduce succession tax, as well as UK inheritance tax, for their family and heirs. With careful and personalised tax planning Spain can be a very tax-efficient place to live for retired expatriates.
At Blevins Franks we structure our clients’ estates to achieve their goals, both in terms of who receives the assets and how, and in lowering the tax bill for your heirs. We aim to make the inheritance process as easy and tax-efficient for your heirs as possible.
Any questions? Ask our financial 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.