Inheritance tax overview
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The document provides an overview of inheritance tax in Spain. It discusses how inheritance tax applies to assets inherited in Spain regardless of the deceased's nationality. It also outlines the factors that determine the tax payable, including tax exemptions, tax rates, the beneficiary's existing wealth, and their relationship to the deceased. Exemptions vary depending on the autonomous community and whether the beneficiary is a resident. The summary provides examples of exemptions available in Andalusia and the Valencia region.
Inheritance tax overview
- 1. What you need to know about Inheritance In Spain Inheritance Tax Overview www.myadvocatespain.com
- 2. Legal Note - It should be remembered that the application of Spanish law varies considerably according to region and the circumstances of each individual and so this report can be treated as a general guide only and not as a substitute for qualified legal advice regarding any particular situation. Responsibility for acting on foot of this guide alone is entirely personal and no liability can be accepted by myAdvocate Spain. To get advice on your specific situation from expert legal practitioners in Spain please see the end of the guide. Claiming an inheritance in Spain: An overview of Inheritance Tax In Spain it is a standard practice to apply the law of a persons nationality to any wills made with regard to their Spanish assets. However, this does not mean that inheritance tax is also determined in this way. It has long been held that Spanish inheritance tax must be paid in Spain where Spanish assets are involved. It is therefore important to understand how these laws operate as they can have a serious economic impact on a family's wealth. In fact, it is not until any inheritance tax liability has been paid that it will be possible to sell or deal with the assets in any meaningful way. How is Spanish inheritance tax applied? Inheritance tax is payable on all bequests of assets including property, vehicles, cash, shares, bonds as well as on any cash paid out by the maturity of a life insurance policy held by the deceased to the benefit of the beneficiary. The amount payable is the net amount after deductible costs and charges. These would include any debts owed by the deceased at the time of death including a mortgage or tax or social security debts (not included would be debts owed to any of the beneficiaries even though they chose to turn down the bequest); health care expenses (dealing with a serious or terminal illness before death for example); funeral costs. Factors that determine Spanish inheritance tax The first major difference between Spanish inheritance tax and elsewhere is that in Spain the tax payable is determined with reference to the heir or beneficiary rather than merely considering the size of the estate itself. Whereas in the UK inheritance tax is only payable where the threshold (currently £325,000) is exceeded and there is no need to consider any other factor if the estate is valued below this, in Spain the following factors are important: 1
- 3. • tax exemptions • tax rates • the wealth of the beneficiary • the proximity of the relation between testator and beneficiary It should be pointed out that, at a state level, no exemption exists for spouses as is the case in other countries. A couple would be considered to own half of a property each. Upon the death of one of the spouses the surviving spouse is considered to have inherited the other half (if this is provided for in the will). Each of the relevant factors will now be considered in turn. Tax Exemptions – State Level Inheritance tax has been effectively delegated by the central government to the autonomous communities in Spain which has allowed the regional governments to set the exemptions that can be claimed by beneficiaries. However, it is important to note that many of the Spanish regions have enacted legislation which requires residency in the area to benefit form the exemptions. This obviously prejudicially affects those who are ordinarily non-resident such as foreign nationals with property and their non-resident heirs. The legislation has caused a great deal of confusion and has in fact been condemned by the European Commission who have informed the Spanish government that the legislation must be changed. The standard response to this has been that the rules discriminate equally against non-resident Spanish as well as other community nationals and so is not discriminatory – at least as between European community nationals. It remains to be seen how the Spanish government will respond to the European Commission. Before looking at the regional exemptions we can look at the exemptions available from the central government and which apply regardless of whether resident or not. For transfer of assets via inheritance, the following exemptions apply Group Deduction €15,956.87, plus €3,990.72 for each year under the age of 21 years, Group I up to a max. deduction of €47,858.59. Group II €15,956.87 Group III €7,993.46 Group IV No deductions available 2
- 4. Group Definitions For the purposes of determining the proximity of a relationship to the deceased, the legislation dealing with Gift and Inheritance Tax in Spain (Ley 29/1987) considers there to be four categories or groups: Group I – Children, including adopted children, under the age of 21 Group II – All other children, spouses and parents Group III – close relatives such as brothers and sisters, grandparents, aunts and uncles Group IV – more distant relatives Example A 16 year old child who inherits from her parents falls into Group I and so may claim an exemption of €15,956.87 + (€3,990.72 * 5) = €19,953.60 to give a total exemption of €35,910.47. In addition to the above exemptions, should any beneficiary be disabled, further exemptions ranging between €47,858.59 and €150,253.03 If the deceased took out a life insurance policy in favour of a beneficiary there is an exemption up to the value of €9,159.49 where the beneficiary is a spouse, child or parent An exemption also exists for tax payable on the permanent or habitual residence. This exemption applies equally to spouses, children and parents of the deceased at a rate of 95% of the value of their inherited portion of the property up to a maximum value of €122,606.47 each. An important proviso exists in that the property may not be sold for a period of 10 years after the inheritance. Other relatives further removed, may also benefit from this exemption but must have been living with the deceased in the property for a period of at least two years prior to the date of death. The state laws regarding succession normally apply to those who are non-resident but who inherit assets in Spain. Whether or not these laws apply depend upon the specific circumstances of each individual situation which would need to be examined by a lawyer expert in the application of regional tax laws. 3
- 5. Tax Exemptions – Regional Level As previously stated, additional deductions are available for those who are resident in the relevant autonomous community. Normally the requirement is that the testator has been 'habitually resident' in the region for five years while the requirement regarding the beneficiary vary. We will look at some of the reductions available in the regions more popular with foreign residents: Andalucia Concept Reductions Permitted Group I: descendants A 100% exemption where the estate is valued at less than under age of 21 €175,000 and the pre-existing wealth of the beneficiary is including adopted less than €402,678.11 children Group II: descendants A 100% exemption where the estate is valued at less than over 21 years of age €175,000 and the pre-existing wealth of the beneficiary is spouse, parents less than €402,678.11 Group III relatives No exemptions specified Inheritance of the 99.99% exemption as long as rules established are primary residence followed An exemption of between €120,000 and €240,000 Disabled Beneficiaries depending on extent of disability. If over 75 years of age an exemption of €275,000 Life Insurance Policy in favour of spouse, No exemptions specified parents or descendants Exemption for 95% exemption where business is inherited by certain inheritance of the relatives family business 4
- 6. Valencia Region (Includes Alicante) Concept Reductions Permitted Group I: descendants Exemption of €40,000 + €8,000 per year for those under under age of 21 21 years of age with a further exemption of 99% of value including adopted of estate where resident in Valencia Community children Group II: descendants Exemption of €40,000 with a further exemption of 99% over 21 years of age of value of estate where resident in Valencia Community spouse, parents Group III relatives No exemptions specified Inheritance of the No exemptions specified primary residence An exemption of between €120,000 and €240,000 Disabled Beneficiaries depending on extent of disability. If over 75 years of age an exemption of €275,000 Life Insurance Policy in favour of spouse, No exemptions specified parents or descendants Exemption for 95% exemption where business is inherited by certain inheritance of the relatives family business Cataluña Concept Reductions Permitted Group I: descendants Exemption of €171,875 + €20,265 per year for those under age of 21 under 21 years of age with a maximum exemption of including adopted €336,875 children Group II: descendants Spouse has an exemption of €312,500; children €171,875; over 21 years of age other descendants €93,750; parents €62,500; cohabitants spouse, parents (as legally defined) €93,750 Group III relatives Exemption of €31,250 Inheritance of the An exemption of 95% up to €500,000 depending on primary residence proximity of relation with beneficiary A exemption of between €275,000 and €650,000 Disabled Beneficiaries depending on extent of disability. If over 75 years of age an exemption of €275,000 Life Insurance Policy in favour of spouse, A 100% exemption up to a value of €25,000 parents or descendants Exemption for 95% exemption where business is inherited by certain inheritance of the relatives esp. children of deceased family business 5
- 7. Canary Islands Concept Reductions Permitted Group I: descendants Exemption of €18,500 plus €4,600 per year under the age under age of 21 of 21. 100% exemption for children under the age of 18 including adopted up to a maximum of €1m. A further reduction of 99.9% children for this group if residents for 5 years. Group II: descendants Exemption of €18,500 and reduction of tax payable up to over 21 years of age 99.9% of the estate where resident. spouse, parents Group III relatives Exemption of €9,300 99% exemption without limit where beneficiary is Inheritance of the descendant under the age of 18 and property not sold for primary residence at least 5 years. An exemption of between €72,000 and €400,000 Disabled Beneficiaries depending on extent of disability. 100% exemption up to €9,195.49 for Group I & II Life Insurance Policy in relatives. 99% reduction of any tax payable on quantities favour of spouse, above this where beneficiary is descendant under 21 parents or descendants years of age 99% exemption where business is inherited by certain Exemption for relatives and according to various rules on value of inheritance of the business and time period during which business must be family business maintained. 6
- 8. Tax Rates The tax rate to apply increases as the amount inherited increases according to the scale published by each autonomous community in Spain or, if such a scale is not published, then according to the scale published by the central government. Obviously regard must be had to where the assets are located to determine which scale is applicable but the following table of the scale published by the central government serves as an example as to how the tax rates function. Taxable Tax Payable Deductible Applicable Amount Euros Euros euros Percentage 0 7993.46 7.65 7,993.46 611.5 7987.45 8.5 15,980.91 1290.43 7987.45 9.35 23,96.36 2,037.26 7,987.45 10.2 31.955,81 2,851.98 7,987.45 11.05 39,943.26 3734.59 7,987.45 11.9 47,930.72 4,685.10 7,987.45 12.75 55,918.17 5,703.50 7,987.45 13.6 63,905.62 6,789.79 7,987.45 14.45 71,893.07 7,943.98 7,987.45 15.3 79,880.52 9,166.06 39,877.15 16.15 119,757.67 15,606.22 39,877.15 18.7 159,634.83 23,063.25 79,754.30 21.25 239,389.13 40,011.04 159,388.41 25.5 398,777.54 80,655.08 398,777.54 29.75 797,555.08 199,291.40 maximum 34.00 Example Where three children each inherit, after deductions and charges, an inheritance valued at €45,000 from a parent, to determine the amount of tax payable by each we would calculate as follows: Up to €39,943.26 the tax payable is €3734.59 The portion above €39,943.26 (€45,000 – €39,943.26 = €5,056.74) is taxable at 11.9% = €601.75 So, total tax payable by each child is €3734.59 + €601.75 = €4,336.34 7
- 9. The wealth of the beneficiary Once the net amount of tax to be paid has been calculated it is multiplied by a coefficient which is determined by a combination of the pre-existing wealth of the inheritor and the proximity of their relation with the deceased as can be seen in the following table: Pre-existing wealth in euros Groups as defined in Article 20 I y II III IV From 0 to €402,678.11 1,0000 1.5882 2.000 Between €402,678.11 and €2,007,380.43 1.0500 1.6676 2.100 Between €2,007,380.43 and €4,020,770.98 1.1000 1.7471 2.200 Above €4,020,770.98 1.2000 1.9059 2.400 Group Definitions For the purposes of determining the proximity of a relationship to the deceased, the legislation dealing with Gift and Inheritance Tax in Spain (Ley 29/1987) considers there to be four categories or groups: Group I – Children, including adopted children, under the age of 21 Group II – All other children, spouses and parents Group III – close relatives such as brothers and sisters, grandparents, aunts and uncles Group IV – more distant relatives Example A brother of the deceased inherits a net estate generating a tax liability of €6,000 (after tax exemptions and all other charges), and he has a pre-existing wealth of €450,000 then the total tax payable increases to 6,000 x 1.6676 = €10,002 8
- 10. Process for payment of inheritance tax in Spain A time-limit is established for the payment of inheritance taxes in Spain, being six-months from the date of death. An application may be made during the first five months to have the deadline extended by a further 6 months. Once granted the extended period of six months begins when the first six months has ended. ** Interest will be charged at an annual rate of 5% until the date the tax is paid. The process for applying for the extension may vary slightly in each region, however typically you will need to present original and copy of the following documents: • Death Certificate • Identification (Passports/NIE) • Brief inventory of assets and values • Reason for requesting the extension Should the application be denied for any reason, the original deadline will be extended by the period of time between application for the extension and notification of the refusal. Documentation It is necessary to complete official form 650 or 652 (simple version) when paying inheritance taxes. These can normally be found in any office of Hacienda (Consejería de Economia, Hacienda y Empleo). Along with the official form it is necessary to include all relevant information regarding the deceased, the beneficiaries and the assets that are the subject of the inheritance. So some or all of the following documents will be necessary: • Form 650/652 • Original and copy Passport Deceased • Original and copy passport Beneficiaries • List of assets with valuations • Original and copy of death certificate • Original and copy of RGAUV certificate • Original and copy of will • If no will, original and copy of 'Decalaración de Herederos' 9
- 11. • List of costs of funeral and support through final illness of deceased • If Life Insurance then Certificate of Life Insurance • Original and copy of property IBI receipt • Original and copy of Vehicle documentation if any • Original and copy of Bank Certificate regarding bank accounts, shares etc • Original and copy of proof of relation with deceased (Birth Certificate) Plusvalía Tax A further tax that may need to be paid at this time is what used to be known as the plusvalía tax which is similar to what is known elsewhere as a Capital Gains tax payable on the increase in value of an asset. In this case the asset referred to is the property or land that is the subject of the inheritance. When a property owner dies and the property passes to their heirs then those heirs may be liable to pay the local town hall for any increase in the value of the property since the time it was purchased by the deceased. A maximum of twenty years applies. An exemption is normally available for this tax, almost to 100% is available where the beneficiaries are the spouse or descendants of the deceased. In any case your lawyer will assist you with determining the exact documents you will need for your particular circumstances and where they need to be presented locally so as to ensure compliance with the law. In the next report, we shall look at what can be done to reduce the amount of inheritance tax payable in Spain. _____________________ For information on contacting legal experts in the field of inheritance tax law in Spain please go to: www.myadvocatespain.com 10