Your Pension Funds and Succession Tax In The Canary Islands

If you are resident Spain, you need to understand the succession tax implications on your pension fund. If you live in the Canary Islands, it can have quite an impact.

There is a lot of discussion at the moment about the UK pension reforms and the options now available for your pension funds. It is essential to seek advice to ensure you understand how each of the options affects you personally, so you can make an informed decision on the best solution for you. You cannot afford to get it wrong.

There is another important pension planning issue that many people overlook, and that is succession tax implications in the Canary Islands. For your spouse’s long-term financial security, you need to understand how this tax will impact your pension funds.

For many people, their pension fund is their most important asset, because it provides all or much of your monthly income. Taxing this fund on your death could substantially reduce this income for your spouse.

Spanish succession tax is charged if the beneficiary is resident in Spain, or if the assets being gifted or inherited Spanish assets. It is the recipient who pays the tax.

Also, there is no blanket exemption from succession tax between spouses. Where they are both resident in Spain, when ones dies, the other can be fully liable on the worldwide assets inherited – and this includes pension funds.

So, when you die, your spouse will have to pay succession tax on the pension funds they inherit from you. This could reduce their monthly income in future.

The progressive rates of succession tax range from 7.65% for assets under €7,993 up to 34% for assets over €797,555.

However there are also multipliers, depending on the relationship between you and the beneficiary and their personal net worth. The overall tax rate could be over 80% in extreme circumstances. For spouses this cannot be offset against any UK inheritance tax, since there is no inheritance tax payable in the UK between spouses (except in rare circumstances).

Under Spanish state rules, spouses and children do receive a tax free allowance, but it is only €15,957.

The local Spanish autonomous communities can adjust the tax rates and allowances to make them more beneficial. Some autonomous regions have significantly eased the tax burden for spouses and children; however, in the Canary Isles, the allowances have only increased a little and the tax liability remains substantial.

Your spouse’s allowance in the Canary Islands is €40,400. Everything else is liable for tax at the rates mentioned above. (There is a 99% deduction on the main home, up to a maximum of €200,000, provided the property is kept for five years, but this does not affect pension funds).

For your spouse’s peace of mind and financial security, you need to consider this succession tax liability on your pension fund now, before it is too late. You need to plan ahead for this, so your spouse is prepared for the impact the tax will have on the amount they receive from you, and therefore on their retirement income, and so you can consider if there are ways to avoid this tax.

Blevins Franks has had an office in the Canary Islands for 20 years, and decades of experience advising expatriates in Spain on their tax, estate and pension planning. We have Spanish tax experts and UK pension specialists, and would be happy to discuss your options for planning for this tax, and potentially avoiding it, and to recommend personalised solutions.

25 February 2015

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.