Estate Planning and Reducing Succession Tax in Spain
Spanish property ownership gives rise to specific taxation issues, which have to be addressed in Spanish Wills and estate planning cases.
Traditionally, Spanish Succession Tax (“SST”) liability was not seen as a particularly onerous aspect to Spanish property ownership. A ‘blind eye’ was generally turned to under-declaration of estate values- and even to complete non-declaration.
The increased powers of investigation of Hacienda (the Spanish tax Authority); the development of communication with other national Tax Authorities; and the sheer growth of investigative manpower and investment in technology have meant that most Spanish property owners now (quite rightly) see that they have no option but to make the required tax declarations. Declared values also now have to reflect reality.
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Prior to the financial crisis, allowances and exemptions were increasing and there was a general movement in Spanish fiscal practice towards reduction of the impact of SST.
However, the fiscal impact of the subsequent financial crisis in Spain has led to a sharp reversal of the previous ‘relaxed’ attitude. Allowances and exemptions are now being reduced and minimum declarable values increasing in real terms so the actual SST impact is increasing rapidly.
So, SST is clearly something which has to be carefully considered and addressed in cases which involve Spanish property ownership. Fortunately, there are often opportunities (which are perfectly legal and legitimate) in Spanish Wills and estate planning, substantially to mitigate the SST burden.
For non- Spanish nationals, it is also important to understand how the SST liability can impact upon- or operate in conjunction with- the liability for inheritance taxes in the country of origin/ nationality.
Some General Principles
- SST is payable on inheritance between spouses on the first spouse’s death (unlike in the UK, in relation to Inheritance Tax (“IHT”)).
- SST is charged on each individual beneficiary (unlike in the UK, where IHT is levied on the Estate).
- Individual SST tax-free allowances are not very generous- typically less than 16,000€ per inheritor.
- Unlike UK IHT, which is usually extremely straightforward to calculate, the SST liability is determined 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 speed of settlement of the SST liability.
- The percentage rate of SST (calculated by reference to the principles above) ranges from just under 8% to over 80% (but the latter is only in the most extreme of cases- specifically in the case of non-related, already wealthy beneficiaries of very large estates).
- 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 impossible to use inherited property/ assets as security to pay SST. In other words, SST must be paid before a beneficiary has access to the inherited assets.
- There is a Unilateral Relief Treaty in place between the UK and Spain. So tax should not be payable twice (i.e. in the UK and in Spain) on the same inherited asset. Thus 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.
Mitigation of Tax Liability
As awareness of the seriousness of the SST issue has grown, so too have the options which are available to well advised owners of Spanish properties, quite legally and legitimately to reduce their potential liability to SST through intelligent, advanced estate planning.
One absolutely fundamental point 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. It is also quite wrong to assume that what achieves tax efficiency in one jurisdiction automatically achieves the same result in another. On the contrary, the danger exists that efficient tax planning in one jurisdiction can have an adverse or counterbalancing effect in another.
Furthermore, even the technical rules regulating residential status, the country (and even region) of residency can also have quite a significant impact on potential tax liability. In-depth knowledge and expertise are of crucial importance in this area of professional practice.
The positive news is that with the benefit of appropriate, dual-qualified professional advice, there are estate planning structures and tools available (both within and outside Wills), to be applied in appropriate cases, to mitigate SST exposure in relation to Spanish properties.
One point is certain- following a death, there is no facility under Spanish law for post-death variation of a Will or estate planning. There is very little beneficiaries can therefore do post-death to reduce SST liability.
The time to put tax efficient arrangements in place starts at the point of making a Spanish property investment, or at the very latest, when dealing with Spanish Wills and estate planning issues. We see from a significant proportion of the Spanish probate instructions we receive that had lifetime specialist professional advice been obtained, beneficiaries could have been spared large devastating (and quite unnecessary) SST liabilities.
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