The European Court of Justice has released a ruling stating that Spain failed to fulfil its obligations to have a fair and equitable inheritance and gift tax regime. Spain will have to change its succession tax laws, though we do not know yet how and when they will do this.
The European Court of Justice released a ruling in September stating that Spain has failed to fulfil its obligations to have a fair and equitable inheritance and gift tax regime. As a result of the ruling Spain will have to change its succession tax laws, though we do not know yet how and when they will do this.
This story dates back to May 2010 when the European Commission sent Spain a ‘reasoned opinion’, requesting it take action to comply with EU rules in regard to inheritance tax provisions. Spain did tweak its laws but it was not enough to make them fully compliant with EU law, so in February 2011 the Commission sent Spain a ‘complementary reasoned opinion’ on the matter. When no further amendments were made to the legislation, the Commission referred Spain to the Court of Justice in October 2011.
The Commission argued that the Spanish rules were discriminatory because they require non-residents to pay higher taxes than residents, even if they live elsewhere in the EU, and this violates the free movement of people and capital within the EU.
So, what is the issue with succession tax?
In Spain, inheritance and gift tax (‘succession 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 to make them more beneficial.
Over recent years, several Autonomous Communities have made significant reforms to their succession tax rules, making them more beneficial for residents. There has been a general trend towards substantial reliefs and increased allowances, resulting in almost total exemption from inheritance tax in certain cases.
In contrast, beneficiaries of non-residents have to pay tax under the state rules, at rates of up to 34% (or more, up to 82%, when the multipliers are added in certain cases), and low allowances of between nil and €16,000.
The system is complex. 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 Community to apply, the deceased must have been habitually resident there for the preceding five years. If not, the state rules apply by default.
Currently, non-residents cannot take advantage of the favourable Community rules. 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, often significantly higher, will be payable than if the individual had been living in Spain.
It remains to be seen how Spain will change its succession tax laws so they no longer discriminate between residents and non-residents.
There was a similar situation with capital gains tax prior to 2007 when residents were charged 15% and non-residents 35% (2006 rates). The EU succeeded in getting Spain to end the discrimination, and while it did begin charging everyone the same rate, residents suffered as their rate increased to 18% (between 21% and 27% in 2014). Could the government take a similar approach here?
Also remember that, if you are a non-resident who owns property or other assets in Spain, while you may end up paying less tax in Spain in relation to your Spanish assets if Spain changes its laws, 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 on the first death 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, UK nationals should seek advice from an expert who is knowledgeable and experienced on the tax regimes of both Spain and the UK and how they interact.
3 October 2014
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.