Information: Spanish Inheritance Tax and YOU.
The main thing you need to know about Spanish Inheritance Tax is that it is a completely different tax to the tax of the same name we know and love in the UK! In fact it is even applied differently in some areas in Spain!
1. Unless you have made complex arrangements to remove your status as a UK Tax Domicile, whether you are resident in Spain full time or not, you are assessable for inheritance tax on your Spanish property in Spain and then again in the UK because as a UK Tax Domicile you are taxable on your worldwide estate regardless of your status of residency and of whether you have paid tax elsewhere, double taxation treaties excepted.
2. The Spanish Tax is a tax on the individual, whereas in the UK it is a tax on the estate – this is why there can be no double tax treaty between Spain and the UK in respect of “Inheritance Tax” because they are different taxes altogether.
3. This may sound ridiculous but most UK solicitors are simply not aware of this, they just put a tick in the appropriate box to claim relief from UK inheritance tax when your UK estate is wound up because inheritance tax has been paid in Spain for your Spanish property, when in fact you there cannot possibly be any such double tax treaty. They are in fact unknowingly acting totally illegally!
4. There is NO tax free transfer on first death of any proportion of your Spanish property’s value to the survivor whereas in the UK the deceased’s assets can pass to the survivor tax free. In Spain a property is owned 50/50 between spouses by law; this means that on first death in Spain 50% of the asset value is taxed regardless. The tax becomes due on first death and in the meantime bank accounts are frozen until it is settled or a deferment agreed with the Spanish taxman – not very funny when you have just lost your spouse.
5. This poses a number of practical problems for the survivor not least that if they then need to sell the property for personal or practical reasons and the market is slow, they may well find that they are under a lot of pressure to settle the tax bill even though it is clear they do not have the means to do so.
6. In the UK we each have an allowance or “nil rate band” of £312,000 of asset value that cannot fall to inheritance taxation; for a couple’s estate this means no inheritance tax is chargeable until the estate’s assets exceed £624,000. In Spain the individual allowance is just €15,957. So if you have a property worth £624,000 then in the UK there would be no inheritance tax to pay but in Spain a property of the same value would attract a total of €161,570 inheritance tax assuming parity between the £ sterling and the €uro! Now that is some difference.
7. Clearly then, Spanish inheritance Tax is a significant cost to the first death survivor as well as to the ultimate beneficiaries because it is they who are taxed directly on their inheritance.
8. In the UK the process of probate is quite civilised and may, quite irritatingly, take some considerable time to resolve. In Spain there are strict time-scales involved; on last death all the tax accumulated from first death has to be paid within a set timescale. If there is no money in the pot to meet these costs or the beneficiaries don’t have the money available to make the payment, then a forced sale of the assets may result which will not necessarily realise the market value of the asset(s). Indeed it may not have been the owners’ intentions to have the property sold at all but rather for their beneficiaries to inherit and enjoy it, unfortunately application of taxation will dictate otherwise and may even vary from region to region in Spain.
