Wherever in the world you are, inheritance tax can be a huge burden on a family already struggling with the loss of a loved one. When the individual or their assets are overseas, the situation becomes more complex and the legalities of the situation are less familiar.
Some forward planning is essential to ensure that the tax burden is not higher or more complicated than it needs to be. Spanish inheritance tax can feel particularly alien - check out this quick guide to get an overview, and seek some professional advice before putting your own tax plans in place.
Inheritance tax - known as succession tax - is managed by both the government and the regional authorities. That means that there are slightly different rules and tax free allowances by region.
Those liable to Spanish inheritance tax laws include:
- Taxpayers who usually reside in Spain
- Non-resident heirs who are receiving property in Spain
- Anyone receiving a payout from life insurance policies where the insurer is Spanish
Because inheritance tax is unpopular, successive regional governments have tried to take steps to reduce the tax their citizens are liable for. This means that some regions have very favourable inheritance tax regimes for some categories of residents.
The local authorities’ taxes apply to those donors and beneficiaries who are habitual residents - meaning five years or more of living in the area. If this criteria is not met, or if the donor or beneficiary lives outside of Spain, then national legislation applies.
How much tax is applied depends on the relationship between the heir and the deceased. The basic rule of thumb is that beneficiaries who are more distant pay more tax than the closest relatives.
It should be noted that the details given here refer to the state tax process, which applies to those who cannot prove their habitual residence in a specific local region. The allowances and exemptions may vary in the autonomous regions of Spain.
The rules are intended to ensure that wealth is passed to direct family heirs, but the net effect of this is that some individuals, such as unmarried couples or step children, might find themselves worse off than spouses and biological children. The legal relationship, not the day to day closeness of the family, is what counts.
Spanish inheritance tax operates with a system of allowances meaning that heirs in certain categories have their tax liability limited (and in some regions, close to waived).
Under the national system, which is detailed below, a spouse might receive an allowance of somewhere in the region of €16000 before paying tax. Children or grandchildren under the age of 21 would receive an additional tax free allowance based on their age. Friends of the deceased would receive no allowance at all.
Any inheritance above the allowance amount for the relevant heir would then be taxed, according to a staggered table of taxation rising from 7.65% tax on small amounts, right up to 34% on the highest amounts.
But you're not through with the calculations yet. The actual tax you’ll then pay depends again on the relationship between donor and beneficiary.
Those in the closest groups (see the table below) will pay the basic amount, rising so that more distant relatives and friends have their final bill doubled. The calculations are complex and vary according to the circumstance and exact habitual residence of the deceased and the heirs, so taking legal advice is recommended.
Until recently the inheritance tax applied to residents in Spain was quite different to that for non- residents. Because they weren’t eligible for exemptions from tax, non-residents could find themselves paying eighty percent more inheritance than a resident might.
However, since a new law took effect in 2015, inheritance tax on non-residents cannot be discriminatory. All EU citizens can ask to be treated in the same way as a Spanish citizen would, according to the local laws of their region.
Whether you can qualify as habitually resident in a specific region depends on how long you've lived there and where the asset in question is. If property in Spain is among the inherited assets then the laws in the local authority where the largest value of the estate is located will apply.
It's worth noting that inheritance tax liabilities might also apply to your original home country, even if you're a resident in Spain.
For example, if you're a British citizen, even if you're a resident of Spain you might still be considered to be domiciled in the UK for tax purposes. In the event that you're liable for tax in two countries, you may be able to offset one payment against the other. Seek professional advice if you think this is the case.
Rates of inheritance tax in Spain are complex, and there are several factors outside the scope of this article. You should always seek professional advice if planning your tax affairs and treat this information as an outline guide only.
The allowances and the tax rates vary depending on the Group the beneficiary falls into. The figures below are the national tax rates, set at the time of the new laws coming into force in 2015, and remain current as of April 2017. Allowances may vary according to the local authority.
|Who is covered||Tax free allowance||Tax liability multiplier|
||€15956 + €3990 / year under the age of 21. Limit: €47858||1.000|
|Group 4||All others including unmarried partners, unless registered as pareja de hecho in certain regions||Not applicable||2.000|
*Details from inspain.today website, correct as at April 2017
To calculate the tax liability in a particular circumstance, you first subtract any allowance available based on the heir’s relationship to the donor.
For any remaining inheritance above this amount, tax is applied according to the staggered table of taxation by amount, before being multiplied by the group level multiplier above. For granular detail of tax liability by inheritance amount please see the table provided here.
There are several other things to consider if you're planning your tax in Spain.
It's helpful to understand the concept of a ‘usufruct’ if you own a property in Spain. A usufruct is where an heir, often the surviving spouse, receives a ‘life interest’ over assets, such as the family home, instead of inheriting a direct share of the property. This means that full ownership of the house can ultimately pass to the children without further tax, and the surviving spouse can still live in the property free for the rest of their lifetime.
It may also be possible for non-Spanish nationals to make a Spanish will leaving their assets as they wish under the law of their own country. This approach is not uncommon but can be contested - seek professional advice if you think this approach might work for you.
Calculating inheritance tax in Spain involves several stages, and can vary depending on a number of local factors. If you've just lost a loved one, then professional advice is crucial to help you navigate the complexities of the system - and if you own property in Spain, or are a ‘habitual resident’, getting professional advice now, to help plan your tax liabilities is a smart move. Then you can sit back, relax, and get on with the important business of enjoying your time in sunny Spain.