How to avoid Inheritance Tax in Spain as a British expat

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

31st January 2022

How to avoid Inheritance Tax in Spain as a British ex-pat

British people moving to Spain may be concerned about paying Wealth Tax during lifetime and Inheritance Tax on death.

There are ways to avoid this tax, and this article will highlight how to mitigate Inheritance Tax in Spain as a British ex-pat.

Inheritance Tax or Wealth Tax in Spain applies to everyone, including residents and non-residents.

Also called Succession Tax, this progressive tax becomes payable upon receipt of an inheritance from a relative or friend, whether this is property, money, or an asset of any kind.

Spanish law specifies how an individual disposes of their estate, but these rules vary depending on where in Spain they live.

Regional regulations enacted by the autonomous communities mean that similar estates in different parts of the country are treated very differently regarding Inheritance Tax laws in Spain.

Aragon, Catalonia, the Balearic Islands, Navarre and the Basque Country all have their own succession rules.

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What are the basics of Inheritance Tax in Spain?

As property and tax accountants serving thousands of UK landlords that purchase buy to let properties, we know that the subject of Inheritance Tax in Spain can often be seen as a daunting subject.

The number of British ex-pats worldwide is circa 5.5 million people, or 1 in 10 of the UK population.

One of the largest ex-pat communities has formed in Spain, with over 400,000 permanent residents living in the country.

British ex-pats living in Spain are concerned about Inheritance Tax, and post-Brexit, an already complex situation has become more challenging to comprehend.

Understanding obligations under Spanish law, the deadlines that must be met, and the relevant taxes to be paid are all critical to avoid incurring tax payments.

There is no concept of a person’s ‘estate’ in Spain, and all beneficiaries are liable to Spanish inheritance tax in some form.

Spanish law recognizes children differently from UK law, with two-thirds of an individual’s possessions automatically going to your children, unless you have a Spanish will that dictates otherwise.

Inheritance Tax (ISDNR) is levied on capital gains obtained by persons through inheritance, bequest, or any other form of succession.

ISDNR is also payable on money received by beneficiaries from life insurance, where a policy owner is a person other than the beneficiary.

A person who is not resident in Spain who receives an inheritance or gift must file an Inheritance Tax self-assessment with the Spanish Tax Agency (AEAT).

Where the deceased was non-resident or where immovable property located abroad is received as a gift, persons resident in Spain must also file a self-assessment with the AEAT.

You have to file a different self-assessment form (either 650, 651 or 655) depending on whether the declaration concerns an inheritance, a gift, or the extinction of usufruct.

Spanish Inheritance Tax EU ruling

Before the 1st January 2015, regional regulations applicable to residents in these regions were much more beneficial to the taxpayer than the State regulations applicable to non-residents, which entailed clear discrimination between European residents and non-residents.

The European Commission asked the Spanish Government in 2011 and 2012 to change the legislation to prevent discrimination. The Commission sued the Spanish State in the Court of Justice of the European Union. This process had its hearing in Luxembourg in January 2014, and the sentence was issued on the 3rd September 2014.

What was the result?

The Tribunal considered that the Commission was denouncing the Spanish legislation for inheritance tax. as it allowed the existence of different treatment to the taxation of inheritance and donations between residents and non-residents in Spain that generated an extra cost for non-resident European citizens

The European Court ruled against the Spanish State for breaching Article 63 of the Treaty on the European Union’s functioning and Article 40 of the Agreement on the European Economic Area.

To quote, “By virtue of all the foregoing, the Court of Justice (Second Chamber) decides: Declare that the Kingdom of Spain has breached its obligations under Articles 63 TFEU and 40 of the Agreement on the European Economic Area of ​​2nd May, 1992, by allowing differ”.

The Spanish Government had to change the legislation so that there was no room for discrimination between residents and non-residents. This way, spouses, children, and parents who inherit from a non-resident in Spain pay the same as those who inherit from residents. As we have already seen, they pay little or nothing in most communities thanks to the reductions, bonuses, and exemptions they enjoy.

Taxpayers who have paid Inheritance Tax and believe they have been discriminated against because of their residence may now legally claim the refund of what they have overpaid.

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We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

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Who pays Inheritance Tax in Spain?

Inheritance Tax is one of the main taxes in Spain and is paid by both residents and non-residents.

Although an inheritance is the most common subject of this tax, it also applies when an individual accepts a gift or receives money derived from any kind of life insurance.

You cannot receive the inherited assets until the tax is paid in full.

You have six months to pay with the possibility of requesting an extension of 183 days.

Payment of Inheritance Tax in Spain can be made in instalments.

Inheritance Tax must be paid if the heir is resident in Spain and receives an asset from abroad or if the assets being transferred are in Spanish territory.

Residents and non-residents subject to Inheritance Tax will enjoy the same rates and allowances.

The Spanish General Directorate of Taxes governs Inheritance Tax in Spain and associated reliefs.

This is in line with the country’s Inheritance and Gift Tax Act (IGTA) which establishes a common platform to regulate inheritance and gift taxes.

Each autonomous region in Spain can modify tax rates and reliefs for their territories.

Unlike in other countries, the recipient of any legacy pays Spanish Inheritance Tax on assets received after death and on lifetime gifts.

Inherited pension funds are also subject to Succession Tax.

How can I reduce Inheritance Tax in Spain? 

Spanish law provides for several Inheritance Tax reliefs.

These differ depending on the heir’s relationship with the deceased.

Those with disabilities receive an allowance of either €47,859 or €50,253, depending on the extent of the disability.

Each Spanish region may increase the tax allowance amounts for these groups.

For example, Valenciana and Andalucia provide significant Inheritance Tax reductions for spouses and children.

It is worth checking with regional authorities to establish exactly how much Spanish Inheritance Tax would be owed.

 

Beneficiaries fall into four groups when it comes to Inheritance Tax in Spain:

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Group 1

Children (natural and adopted) under 21 get an allowance of €47,859.

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Group 2

Children (natural and adopted) over 21, grandchildren, spouses, and parents/grandparents (including adoptive) get an allowance of €15,957.

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Group 3

Siblings, aunts, uncles, nephews, nieces, in-laws and their ascendants/descendants get an allowance of €7,993.

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Group 4

Cousins, all other relatives, unmarried partners, and unrelated people get no allowance.

Spanish Regional controls on Inheritance Tax

There are 17 Regional Governments (“Comunidades Autónomas”) with different rules applicable to the taxpayers connected to each local Government. The provincial government succession tax/inheritance tax laws override national tax laws.

You are advised to get legal tax advice to ensure that the relevant inheritance tax laws are applied to your case based on where you lie and where the asset is situated.

There are several regions in which parents, children and spouses of the deceased practically pay nothing at all.

– In Cantabria, there is a 100% bonus in the final tax figure for inheritors of groups I and II.

– The final tax figure has a 99.9% bonus in the Canary Islands.

– In Andalusia, there is a reduction of the tax base of €1,000,000, and the final tax bill has a 99% bonus.

– In Madrid, the final tax figure has a 99% bonus.

– In Extremadura, the final tax figure has a 99% bonus.

– In Murcia, the final tax figure has a 99% bonus.

– In La Rioja, there is a 99% bonus in the final tax figure should the tax base is below €500,000 and a 98% bonus if the tax base is over that figure.

– The Basque Country are exempt from payment on the first €400,000. The rest is taxed only at 1.5%.

– In Navarra, there is a flat rate of 0.8% for the wife/husband from €250,000. Ascendants and descendants have a tax of

2% from €250,000 to €500,000

4% from €500,001 €1,000,000;

8% from €1,000,001 to €1,800,000

12% from €1,000,000 to €3,000,000

6% from €3,000,001

 

– In Castilla La Mancha, there is a bonus in the final tax bill of

100% when the tax base is below €175,000

95% for tax bases between €175,001 and €225,000

90% when the tax base is between €225,001 and €275,000

85% for tax bases between €275,001 € 300,000

80% for tax bases exceeding €300,000.

 

– In Catalonia, the spouse has a 99% bonus, and children have a bonus that starts at 99% and is reduced as the taxable figure increases. For example, for a taxable figure of €1,000,000, the bonus is 84.60%. Furthermore, 95% of the family home value is exempt with a maximum figure of €500,000.

– In the Valencia region (Costa Blanca), There is a 75% bonus applicable to the final tax figure for children under 21 (group I) and a 50% bonus on the final tax bill for the spouse, children, over 21 and parents (group II). There are also reductions in the tax base concerning the inheritance of the main property.

 

– In the Balearic Islands, there is a

99% bonus over the tax figure for children under 21 (group I).

There is a reduction on the tax base of €25,000 per beneficiary of group II (spouse, children over 21 and parents). That amount increases for children under 21.

Both groups (I and II) are taxed at

1% up to €700,000

8% from €700,001 to €1,000,000

11% from €1,000,001 to €2,000,000

15% from €2,000,001 to € 3,000,000

20% from €3,000,001+

100% of the habitual residence is deducted from the tax base up to a maximum of 180,000 € per heir (children, parents and spouse) who have lived with the deceased.

Plus many many more to consider

In a good number of regions, property owners who have had the foresight to grant a Spanish Will shall find in the majority of cases their heirs will not have to pay Inheritance Tax, and if they have to pay it, would very rarely reach a high rate.

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Are there tax exemptions on Spanish property?

There are also tax reliefs on Spanish property for Inheritance Tax purposes.

The inherited value of the main home of the deceased attracts a 90% allowance against its value, up to €122,606 per inheritor.

The deduction only applies to Groups One and Two from the list above or if a relative above 65 lived with the deceased for two years before their death.

If the heirs don’t sell the deceased’s primary residence after five years, they can also claim an additional tax allowance.

Which assets are subject to Inheritance Tax in Spain for non-residents? 

If you are a non-resident, but you receive assets in Spain through inheritance, you must consider Inheritance Tax.

To inherit the assets that a person has in Spain, the heir (although not resident) must pay the tax and the municipal Capital Gains Tax in the case of inheriting real estate.

In this case, only the deceased’s assets in Spain are taxed and not their foreign assets.

Do I need to pay taxes in Spain if I sell an inherited property?

You pay Capital Gains Tax depending solely on the property’s value as of the date of death.

This applies if you inherit the property and then sell it for a profit.

How can I avoid Inheritance Tax in Spain?

In Spain, you can choose to renounce an inheritance and thereby stop taking an interest, but you have to renounce the whole inheritance.

This must be addressed by a public notary and is irrevocable.

You are not responsible for the Succession Tax that would have been owed if you renounced the inheritance.

Wealthy individuals can avoid Wealth Tax in Spain by tying up their capital for five years.

They can also set up a Personal Portfolio Bond so that the life assurance has no immediate value and can therefore be excluded.

 

 

There are also Exempted Assets that are not considered a part of wealth when it comes to liability for tax. These include:

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Jewellery

In possession of ruler not being his personal property

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Interest in

Coparcenary property of Hindu undivided family

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Property

Held under trust/for charitable or religious purposes

Who is required to file Form 650? 

Form 650 must be filed by heirs, legatees or beneficiaries of life insurance (natural persons) who are not residents in Spain.

It must also be filed by residents acquiring assets or beneficiaries of life insurance from a deceased person who was not resident in Spain for tax purposes.

When completing a self-assessment form, the following documents must be included: The original and a copy of the declaration of acceptance of the inheritance.

If this does not exist, the following documents are required:

– a complete list of the assets of the deceased and the heirs showing the data identifying the deceased

– the names of the heirs and an address for notification.

It is also necessary to have a detailed list of the assets and rights that are the subject of inheritance, with their respective values at the time of death and the charges, debts, and costs for which deduction is required.

 

Documents required

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Death certificate

A copy of the death certificate must be submitted.

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Will

A copy of the will and declaration of heirs should be included.

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Power of Attorney

A copy granting power of attorney to the representative must also be submitted.

What are the Forced Heirship rules in Spain? 

There are several rules concerning the disposal of your estate in Spain.

If your estate is dealt with under Spanish inheritance law, Forced Heirship rules apply.

This is also known as the Law of Obligatory Heirs in Spain.

This means there are restrictions on how you distribute your estate, as a certain percentage needs to be set aside for close relatives. These percentages vary from region to region in Spain.

The nationwide Law of Obligatory Heirs states that if the deceased was married at the time of death, the spouse keeps 50% of all jointly-owned property.

The remaining 50% goes towards the estate. The division of the estate is in three equal parts:

* One third equally between any surviving children.

* One third for surviving children but the deceased can distribute equally or unequally according to instructions in a will. The surviving spouse retains a life interest (usufruct) in this part of the estate, and the children do not inherit until the spouse dies.

The deceased may dispose of the final one-third freely in a will.

If there are no children, then surviving parents can claim one-third if there is a surviving spouse, or 50% if not.

If there are no children, parents, or spouse, the deceased can leave this to anyone using a will in Spain or abroad.

Foreigners living in Spain may not give away more than the freely disposed part of the estate (one-third), as the rest must be reserved for obligatory heirs.

Suppose an international or Spanish law stipulates that the laws of the testator’s nationality apply. No aspect of Spanish inheritance law applies to either Spanish or worldwide assets in that case.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

What if an ex-pat leaves no will in Spain? 

If an ex-pat dies intestate without a will and owns property or assets of any kind, a lengthy and complex process may follow.

Spanish law requires that the inheritance process be completed within six months.

If the death occurred overseas, the estate’s beneficiaries require several death certificates for official entities.

Certificates that are not in Spanish must be officially translated and legalized.

To claim or handle someone’s Spanish estate if they died without a will, you must apply for a grant of probate.

EU citizens can generally apply for such a grant in their own country.

These probates must also be translated and then legalized before you can present them to a public notary in Spain to claim your inheritance.

Your lawyer can also request a statement from the Central Registry of Spanish Wills that the testator had no will in Spain.

The main documents required include:

– Death certificate

– Legalized passport copy

– Spanish Tax Identification Number for Foreigners (NIE)

– Power of attorney from the heirs

– Copy of the heirs’ passports

– Birth and marriage certificates to prove a relationship

– NIE numbers of the beneficiaries

– A list of the testators’ assets

– Up-to-date bank statements

It is recommended to consider building a funeral place as soon as ex-pats move to Spain.

While funerals in the UK take place up to three weeks after the death, this is not the case in Spain. Funerals take place one or two days after a person’s death.

Another key difference with the UK is that most funeral directors in Spain expect upfront payments.

Parents and grandparents are encouraged to put plans to reduce the burden of a sudden unfortunate event, especially due to the limited timeframe and the difficulty in travelling across Europe.

Firms specializing in funeral planning for ex-pats living in Spain are available to help minimize the stress of this process.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

Free online tax course

Free – Access NOW!!

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