The topic of Inheritance in Spain is a fairly complex and technical one, allowing for multiple articles on the matter.
Besides a general legal framework which is applied nationwide (Law 29/87 andOrdinance 1629/1991), each of the 17 existing autonomous regions that make Spain are additionally empowered to rule on some aspects enacting their own laws i.e. on applying their own tax allowances.
There’s an ongoing trend to abolish Spanish inheritance tax fostered by Spain’s conservative party. These trends are always very popular amongst voters. Many regional communities have jumped onto the band wagon and are now applying reductions on IHT to such an extent which in practice translates to almost suppressing it i.e. Madrid, Basque Country, Navarre, Valencia, Balearic and Canary Islands.
Other regional communities, despite not having suppressed IHT, apply their own tax allowances in addition to those set by the Government in the above laws. Such would be the case of Andalucía in which beneficiaries, resulting from a death occurred after the 7th of June 2008, may benefit from the following regional tax allowances:
– Reduction of 99.99% in the IHT taxable base on inheriting the family home (deaths occurred since the 1st January 2003). This requires the beneficiaries to be resident in Spain.
– Reduction of 99% in the IHT taxable base on those inheriting a business – providing certain criteria is met.
– No IHT paid on the Estate itself on compliance with certain requirements (i.e. inheritance taxable base < €175,000 heirs are next of kin or spouse, heirs pre-existing wealth < €402,678 ).
– No IHT paid by physically handicapped (disability above 33%) with a taxable base < €250,000.
Is the Dread on Spanish IHT Justified? Not so
Spanish inheritance tax has been grossly overblown over the last years by a minority with a vested interest in peddling doubtful financial products or else complex holding structures to non-residents at large who, in most cases, are in no real need of them.
These ‘creative’ solutions often involve high setting up fees as well as high annual costs that can altogether negate the sought tax mitigation. Besides, you run the risk that if you decide to sell the property later on in life, for whatever reason i.e. health issues, some purchasers’ lawyers may turn down deals when the property is locked up within a string of holding companies because of the associated legal risks. Naturally these companies can always be wound up – at a prohibitive expense – to sell on the underlying property although it may take some time. And last, albeit not least is the point on who’s really in control of such corporate structures.
I just have to make a special mention of equity release schemes that were sold by unlicensed agents in Spain to senior affluent foreigners. These schemes were supposedly devised to avoid or greatly reduce Spain’s IHT. The way they worked is that you borrowed money against your villa by placing a mortgage against it. The borrowed funds were put to work in some ‘safe’ offshore fund which gave a ‘guaranteed’ yield of 5% p.a. The theory was that the yield would pay off for the high setting up fees and ongoing expenses, almost self-financing itself – too good to be true. In this manner, on passing away, the estate went untaxed as it already had a lien against it – that’s the theory or sales pitch.
In practice things panned out very differently for these would-be-investors who ended losing both their homes and the borrowed money – which they never saw by the way –to these lenders as the property market took a nosedive. There were clauses ‘hidden’ within them that triggered repayment – in full – to lenders if the value of the collateral fell by more than 20 pc. By then your ‘safe’ yield was making a massive loss and as most of these borrowers were asset rich but cash poor they were forced to surrender the property – which acted as collateral – to these lenders.
Basically what these lenders were really doing was to buy trophy homes for a fraction of its market price. They knew very well that the invested funds would soon be in the red. And they let the magic of compound interest do the rest with owed funds increasing exponentially over time as losses continued to mount. It was only a matter of time until you were notified to either provide additional security or else surrender the collateral. It was pay up or put up.
It was always apparent to me – I am slightly pessimistic – that property prices were going to nosedive significantly post boom. You just cannot seriously expect real estate to appreciate by over 300pc over an eight-year period in Spain not to fall significantly over the following years – not to mention how very overvalued these properties were to start with by surveyors for the purpose of applying for a mortgage loan. Surveyors who were strongly ‘recommended’ by lenders but who oddly enough were paid for the borrower himself.
The more the property was worth, the more the borrower could borrow tightening the noose around their neck even further should the market turn the corner. Because the more you borrowed the easier it became to lose your property on a market downfall. The writing is on the wall.
Making a Spanish Will: The Advantages
1. A Spanish will is exclusive to your assets located in Spain. It doesn’t preclude any will you may draw up in your home country whether before or after. This means that the Spanish will won’t overrule your national will and affects only your Spanish estate – providing your national will holds no provisions on Spanish assets.
2. Drawing up a Spanish will may help your heirs mitigate their tax bill. There’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax. You can request a deferral within the first five months of the death but heirs may still have to pay the penalty and/or delay interests depending on how late they actually pay. You can also request to fraction the IHT paying in instalments up to five years. After the six months deadline has elapsed your beneficiaries will incur in penalties for late payment typically ranging from 5%, 10% and 15% if paid in the next 3, 6 and 12 months as from the said deadline. If payment is made after 12 months from the deadline a surcharge of 20% is applied besides the accrued delay interests. Bear in mind that deposit monies held at a bank will be frozen upon death – access to them will be restricted until the IHT is settled with the tax authority.
Spanish wills have the advantage that they can be executed almost immediately whereas a UK or Irish one will no doubt exceed the six-month deadline attracting penalties from the Spanish Tax Office for late payment. The reason is that a Grant of Probate must be followed in your home country which takes a long time in my experience and besides is fairly expensive. It is usual that foreign wills take in excess of a year or more to be executed in Spain. This translates into higher expenses borne by your beneficiaries due to the surcharge for late payment incurred on surpassing afore mentioned six-month deadline.
So in a way, making a Spanish will helps to mitigate your heir’s tax bill as it will ensure they will be able to file IHT within the stipulated legal timeframe of six months without attracting penalties and surcharges which could have been so easily avoided.
3. Drawing up a Spanish will saves both money and hassle. On making only a national will your beneficiaries will have to translate all documents (death certificate, will) into Spanish by a sworn translator, notarise them and affix to each of them the Apostille seal of the Hague Convention of 5th October 1961. They will also have to obtain a Grant of Probate which must also be translated into Spanish and apostilled. Additionally a Certificado de Ley (certificate of legal compliance) may be necessary explaining the inheritance procedure in a foreign country.
The above greatly – and unnecessarily I may add – increases the expenses for your beneficiaries besides delaying significantly the whole transfer of estate procedure; thus attracting the penalties highlighted in my point two above. A Spanish will eliminates the need to follow all the above steps.
4. Spanish wills are stored safely at no extra charge. On you making a Spanish will you will be given only a “copia simple” (simple copy) or “copia autorizada”. The original is stored by the Notary in his files for record. The Notary will send off to Madrid the details of this will to a registry known as “Registro General de Actos de Última Voluntad” (Central Registry of Last Wills) for safekeeping. Your beneficiaries can always request an authorised copy (“copia autorizada”) of the testator’s last will from the Notary who witnessed it. You can always know before which Notary it was made (if you happen not to know it) by means of requesting a “Certificado de Últimas Voluntades” from the aforementioned Central Registry of Last Wills. It’s just an A4 sized sheet of paper from the Ministry of Justice with the seal of the said registry which specifies which Spanish Notary witnessed the last will and the date on which it was made. The latest will always overrule any prior will unless specified otherwise.
In Conclusion
It is important to plan ahead to mitigate IHT, especially on large estates. A specialised lawyer can greatly reduce or even eliminate completely exposure to this tax. IHT rules vary widely from one region to another. There’s an ongoing trend to abolish IHT in Spain.
Ideally foreigners should make two wills; one in their home country ruling on their national assets and a second Spanish will drawn up in Spain which will rule only on their Spanish estate. Spanish wills can be drawn up in Spain (Notary) or at a Spanish consulate.
A Spanish lawyer can assist you both making and executing one.
“In this world nothing can be said to be certain, except death and taxes” – Benjamin Franklin.
Founding Father of the United States. Exceptionally gifted scientist, inventor, diplomat, writer, printer, postmaster and political theorist. Even politician in his spare time; nobody’s perfect.