United States Spanish Inheritance Tax Explained

As retirement draws near, many of us begin to think about how we want our hard-earned earthly possessions to be distributed amongst our nearest and dearest. Making a will, of course, is a good starting point, but we also might want to think about the slice of the pie that the taxman will take from our relatives’ inheritance.

For British expats living in Spain this is an important consideration, as Spanish laws governing inheritance are much more complicated – and potentially far more punitive – than those in the UK. For instance, in the UK, assets left to your surviving spouse or civil partner are free from inheritance tax. However, in Spain, as there is no concept of a person’s ‘estate’, all beneficiaries are liable to inheritance tax in some form or other.

Furthermore, Spanish inheritance law recognises children in a different way than UK law, with two thirds of your possessions automatically going to your children. If this is not in line with your wishes, it is vital that you insert a clause in your will that states that your inheritance must be administered in accordance with the UK rules. In Spain, the tax is known as Succession Tax, which is both an inheritance tax and a gift tax on worldwide assets.  The tax is NOT applicable ONLY if the assets are outside of Spain AND the beneficiary is not resident in Spain.

Complicating this, in Spain there are different allowances which may apply: ones set by the State (these are usually applied to non-resident beneficiaries or if the donor is non-resident) and the others set by the autonomous region you live in.

The State/Regional regulations classifies beneficiaries under a will into four categories:

Group 1 Group 2 Group 3 Group 4
Natural and adopted children under 21 Children over the age of 21 In-laws and their ascendants or descendants All others including unmarried partners not registered as pareja de hecho
  Grandchildren Stepchildren  
  Parents and grandparents First cousins  
  Spouses Nieces and nephews  
  Unmarried partners registered as pareja de hecho (domestic partner) Aunts and uncles  

 

 

Sisters and brothers  
Main state allowance: *€15,956 Main state allowance: *€15,956 Main state allowance *€7,993 Main state allowance: Nil

 

*Allowance is increased €3,990 for each year the beneficiary is aged less than 21, up to a maximum allowance of €47,868.

The tax rate payable starts at 7.65% and is banded on the amount gifted up to a top rate of 36.5%.  Further multipliers on the tax due apply depending on the beneficiaries pre-existing wealth and their relationship to the donor.

 

Pre-existing wealth € Groups 1 & 2 Group 3 Group 4
€0 - €402,678 1.0000 1.5882 2.0000
€402,678 - €2,007,380 1.0500 1.6676 2.1000
€2,007,380 - €4,020,771 1.1000 1.7471 2.2000
Over €4,020,771 1.2000 1.9059 2.4000

 

There are three critical points to note about the State inheritance rules:

Firstly, while in the UK a beneficiary in a will is not liable to pay tax on the first £325,000 of their inheritance, under State rules, for those relatives falling into in Group One, this relief is granted only for the first €15,956.  This is a huge consideration when planning for your family’s future.

Secondly, Spanish law does not recognise common law partners. Unmarried partners, therefore, (unless registered as pareja de hecho – a status only available in some regions) fall into the fourth Group, which does not carry a tax-free allowance, meaning that they will be liable to pay tax on 100% of any inheritance.

The final point concerns the inheritance of property. Under State law, a 95% tax reduction is applied to the value of the main residence (up to a maximum of €122,000). However, if the property is sold within ten years of death, the tax liability is recalculated, which will doubtless result in a much higher tax bill.

Thankfully, the allowances available to residents of Valencia are more generous.

In Valencia, for instance, the tax allowance for beneficiaries in Groups One and Two is €100,000 for each person, with a further 75% discount applied to any tax due (although this allowance is liable to be reduced significantly in 2017).

Investments can be structured in a simple and legal way to mitigate Succession Tax in Spain, between married couples and partners.

And in terms of property, while there is still a 95% reduction on the value of the main residence, the value of the property may be as much as €150,000 - and the lock-in period before it can be sold without incurring additional tax is just five years.

One way of circumventing this rule, at either State or regional level, is by leaving the property to your children/grandchildren (using multiple allowances) and granting the surviving spouse a Usufruct or ‘life interest’. So, while the children technically own the property, the remaining spouse is able to use the house for the remainder of their life, with the idea that full ownership will eventually pass to the children without further tax.

As a Brit, either living or owning property in Spain, there is a raft of considerations when it comes to succession planning.  If you would like more information on avoiding the common Inheritance Tax pitfalls or advice on any of the issues raised, you can contact me at This email address is being protected from spambots. You need JavaScript enabled to view it. or through this form.

I can also help you track lost pensions, including personal pensions or occupational pensions and schemes used to “contract out”. If you have lost touch with a pension scheme since moving to Spain we can contact them on your behalf to find out what your pension entitlement may be.

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