Will You Leave Your Spouse A Succession Tax Headache If You Are Not Spanish Resident?

Do you own property in Spain and spend a lot of time here, but either limit the number of days to avoid becoming tax resident or believe you are not tax resident and so have not submitted tax retu

Do you own property in Spain and spend a lot of time here, but either limit the number of days to avoid becoming tax resident or believe you are not tax resident and so have not submitted tax returns in Spain? In either case, have you considered your succession tax position? Can your spouse afford for you to be non-resident?

Spanish assets are always liable to succession tax, whether or not you are resident here. Spain currently has both state and regional rules for this tax and the difference between the two can be considerable.

Over recent years several Autonomous Communities have made significant reforms to their succession tax rules. There has been a general trend towards substantial reliefs and increased allowances resulting in almost total exemption from tax for inheritances to spouses and children in Communities like Murcia, Islas Baleares, Islas Canarias, Castilla y Le?, Madrid, Comunidad Valenciana and Andaluc? (with limits).

Such generous exemptions are in stark contrast to the state rules, where the allowances are very much reduced – the general allowance is only ?16,000 for inheriting spouses or children. The tax rates range from 7.65% to 34% but, depending on the relationship of the recipient and donor and the recipient?s net wealth, multipliers can push up the amount of tax to be paid. There is a 95% allowance against the main home for spouse and descendants, but this is capped at ?122,606 per inheritor and they must retain the property for 10 years.

The system is complex, since the rules within each Community vary and different allowances and 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.

Non-residents therefore cannot take advantage of the favourable Community rules, since they will fail the habitual residence condition. Even though the property may be situated in a Community with favourable inheritance tax rules, these rules are of no benefit. Higher taxes ? potentially much higher – will be payable than if the individual had been resident in Spain.

The European Commission has sent official notice to Spain that their succession tax rules are discriminatory and not compliant with EU law. If Spain does not respond the case may be referred to the European Court of Justice.

It remains to be seen whether Spain will change its succession tax laws so they no longer discriminate between residents and non-residents. It certainly cannot afford to lose any tax revenue at the moment. 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 began charging everyone the same rate, residents suffered as their rate increased to 18% (now 19% or 21% for total savings income and gains over ?6,000). Could the government take a similar approach here?

If you are a British domicile your Spanish property also forms part of your worldwide estate for UK inheritance tax (IHT) purposes, though any Spanish succession tax paid is deductible against the UK liability. Since there is no blanket exemption from succession tax between spouses under the Spanish state rules, the Spanish tax payable represents a true cost that cannot be offset against any IHT on the property.

Your Blevins Franks Partner will talk you through the implications of being tax resident in Spain and how this may be beneficial for you, and advise on your options for reducing UK inheritance and Spanish succession taxes.

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.