If you live in Spain, own a Spanish property or expect to inherit or be gifted Spanish assets from family or friends in the future, it’s important to understand what how Spanish Succession Tax (SST) may be applied to your circumstances.
For expats living in Spain, or a non-Spanish nationals who inherit or acquire property in Spain, it’s also important to understand how SST liability can affect your liability for similar taxes (such as the Inheritance Tax) in your country of origin.
Now, the word on the street (or more accurately, the word on expat forums) seems generally to follow the line of either: “don’t worry about SST, nobody pays it” or “SST is a nightmare and you’re going to be trapped and paying a fortune!”
However, when you dig deeper, it quickly becomes clear that neither of the above points of view are correct, and that actually you can manage Spanish Succession Tax fairly easily.
Liability for SST does indeed arise for many expats who live in Spain, own Spanish property or who have friends or close relatives living in Spain who leave them assets or property in their will.
SST is a form of inheritance tax, and as most countries in the developed world have such a tax we shouldn’t be surprised to come across it in Spain.
The good news is, it is a tax that you can plan for with understanding. What’s more, there are often legal and legitimate opportunities for you to take steps to substantially mitigate any SST burden.
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Recent Changes in Spanish Succession Tax – Good News for Expats
After a legal process in the European Court of Justice the Spanish Government was forced to adapt its domestic law regarding various taxes payable in Spain. Among them was Inheritance and Gift Tax.
The changes to the Spanish Law mean that your beneficiaries might not have to pay any Inheritance Tax in Spain or that their exposure to the tax is drastically reduced.
Unfortunately there was no express declaration of retroactivity in it, so it would only be applicable to taxable events that take place after its entry into force on 1 January 2015.
However, if your liability to SST happened prior to that time, and you haven’t paid it yet, the old rulings wouldn’t be enforced on you.
So how inheriting Spanish assets or inheriting by Spanish residents works now?
Before the ECJ ruling (before January 2015) only Spanish residents that inherited from other residents could take advantage from the reductions in the taxable figure for the main residence, bonuses that were applicable directly in the final tax figure, or tax exemptions according to regional laws.
Now all those reductions, bonuses and exemptions are available for non-residents in Spain as long as they are residents within a country member of the European Economic Area (E.E.A.).
The General Principles That Apply to Spanish Succession Tax (SST)
You have to pay Spanish succession tax if the inherited assets are in Spain and/or if you (the heir) are resident in Spain (even if the assets are outside of Spain).
Here are the key considerations of Spanish succession tax:
- Spanish Succession Tax is payable on inheritance between spouses on the death of the first spouse (unlike in many other countries in relation to Inheritance Tax).
- Spanish Succession Tax applies to pension funds as well.
- SST is charged on each individual beneficiary (unlike in the UK, where IHT is levied on the Estate).
- Individual SST tax-free allowances are just under 16,000€ per inheritor. There is a 95% allowance against the main home for a spouse or children, but it’s limited to €122,606 per inheritor and only if they keep it for 10 years.
- Unlike UK IHT, which is usually extremely straightforward to calculate, the amount of SST ultimately payable is influenced by a number of criteria.
These include: relationship between deceased and beneficiary; value of inheritance; age of beneficiary; pre-existing wealth of beneficiary; location of assets; class of assets; existence of mortgages; residential status of deceased and beneficiary; and how quickly the SST liability is settled.
- SST is applied at progressive rates from 7.65% to 34%. However, in some cases it can go as high as 80%.
- Such circumstances are a very rare occurrence. To receive a bill of 70% Inheritance Tax, for example, the following conditions should be met: each heir should inherit over €2m, not have any family relationship with the deceased and have a pre-existing wealth in Spain (before inheritance) over €4m.
- To avoid interest and penalties, SST must be settled in full, prior to the expiry of the period of 6 months from the date of death.
- Generally, it is not possible to use inherited assets (or inherited property as security) in order to pay SST.
In other words, arrangements must be made for SST to be paid before a beneficiary has access to the inherited assets – which can make life very difficult if you do not have the funds to pay, and actually need the inheritance to enable you to pay.
- If you leave your Spanish assets to your spouse, who passes them to children when he/she dies, tax will be due again on the second death.
Is there a taxation treaty between Spain and your country of domicile that covers succession and inheritance?
It’s worth checking whether there are agreements in place between Spain and your home country that might protect you from being taxed twice on the same inherited assets.
As an example, there is a Unilateral Relief Treaty in place between the UK and Spain.
This means that British expats living in Spain or British residents inheriting Spanish assets should not have to pay tax twice (i.e. in the UK and in Spain) on the same inherited asset. The total (combined) tax payable is, in effect, equal to the higher of the two.
However unfortunately, this relief is only available as a credit against ‘equivalent’ taxes.
A spouse-to-spouse inheritance, for example, is exempt from UK IHT. Therefore, relief is not available in the UK for any SST paid by a spouse by reason of inheriting Spanish assets from their deceased spouse.
There is also an argument which undermines the general effect of the Unilateral Relief Treaty, as IHT is chargeable on the Estate, whereas SST is levied on the individual beneficiary – so are they really equivalent taxes in any event? A clear ruling on the point is awaited.
Where in Spain Are You Resident?
It’s not just the country of your residence that’s important when determining your SST liabilities. Where exactly you or your assets are located in Spain can also have quite a significant impact on what you will have to pay in tax.
In Spain both state and local autonomous communities have a say over Spanish Succession Tax. Each community can change the state rules.
In Comunidad Valenciana, for example, spouses and children receive an allowance of €100,000 each. They can also benefit from a 75% reduction in the amount of succession tax payable.
In Murcia, the taxable inheritance for children under 21 is reduced by 99%, while older children and spouses get a 50% reduction.
In the Basque Country the first 400,000 € for each heir are exempt of tax. The rest is taxed only at 1.5%.
In the Canary Islands, Madrid, Extremadura and some other regions the final tax figure has a bonus of 99% or over.
In Navarra there is a flat rate of 0.8% for the spouses that starts from €250,000. Depending on the sum of the inheritance, ascendants and descendants have to pay between 2% and 16%.
La Rioja residents get a 99% bonus in the final tax figure for the assets below €500,000 and a 98% bonus if the tax base is over that figure.
Liability for SST may come as a great shock to many expatriates, particularly for surviving spouses who are already reeling from the loss of their partner.
When they are suddenly faced with a tax demand, which they were never warned about when they bought their dream home in the sunshine, they can be left devastated.
It’s worth doing a bit of research to understand fully how SST can impact you and your family, that your local rules concerning inheritance taxes are and also how your country of domicile would treat this inheritance.
One point which must be made absolutely clear is that each case is unique.
When dealing with dual (or multi) jurisdictional estate planning, it is essential that the specific circumstances of the case are analysed carefully to ensure that the tax saving tools and documentation employed operate as intended in both (or all) jurisdictions.
It is impossible to employ a ‘one size fits all’ approach to tax planning.
It is also quite wrong to assume that what achieves tax efficiency in one country automatically achieves the same result in another.
In other words, there is always the danger that what is seen as efficient tax planning in one country can have an adverse or counterbalancing effect in another.
That’s why it’s important to have personal and qualified advice covering your entire international status.
One thing is certain: once you have died there is nothing you can do – and very little your beneficiaries can legitimately do – to reduce SST liability!
Therefore, the time to consider the issue, do your research and maybe even take professional advice as to how best you can deal with your will and estate planning issues.