At our recent event, 'Navigating international mobility and wealth: Insights from global jurisdictions' a panel of legal experts in from Scotland, France, Italy, Spain and the United States explored the challenges faced by international clients.
In this insight article, Alvaro Aznar Azcarate of Buckles LLP focuses on the Spanish perspective, discussing the tax considerations for families when relocating to Spain.
Overview
Spain is divided in 17 regions (comunidades autonomas) and two autonomous cities in Northern Africa. From an organization point of view, the comunidades autonomas are a hybrid between regions and a federal system. This is important in the context that the regions develop their own legislation in certain legal matters and taxes. Not all the regions tax the same way, and the differences can be striking when it comes to tax.
Administration of Estates in Spain
Whilst it is not compulsory to instruct a lawyer, it is advisable. Estates in Spain are not administered, it is purely a transfer of ownership between the deceased and the beneficiary. This is all recorded in a notarial deed signed by the parties or their legal representatives. Problems can arise if there are disputes or disagreements by the beneficiaries. Once the Deed is executed it will be then sent to the tax authorities for payment and assessment so then assets can be released, and transfer of ownership can be registered at the Land Registry. It is important to mention that real estate cannot be sold until the property is registered in the beneficiary’s name. In a similar situation will be the bank accounts and other financial products, the beneficiaries only can receive the money after the documents accepting the Estate have been signed by all the heirs or their representatives.
Applicable law to succession
Spain is a party to the EU Succession Regulation (EU 650/2012) which will determine the applicable law to the succession of individuals with ties to Spain. The Eu Succession Regulation only applies to deaths after 17 August 2015. Prior to this date, the applicable law will be that of the law of the nationality of the deceased.
In Spain for inheritance and family matters, there is a distinction between General law (derecho común) that applies to the majority of the country and regional law that applies in certain regions such as Galicia, Navarra, Basque Country, Aragon, Catalonia, Valencia, Balearic Islands amongst other.
Reserved heirship provisions
If Spanish law is to apply to an estate, it is important to mention that there may not be testamentary freedom if there are reserved heirs. Reserved heirs the descendants, ascendants and spouses of a person. If a person is married and has children, the children and the spouse have a series of automatic rights on the estate. Under General Law, children will be entitled to 1/3 divided equally and a further 1/3 that can be left to all or some of the children. The spouse has an usufruct or interest in possession over a 1/3 share. If a reserved heir is not mentioned in a will, and another person is named as a voluntary heir, the reserved heir can contest the will.
Matrimonial Property Regimes
In Spain, there is no marriage without a matrimonial property regime. These are a set of rules that govern the financial aspects of a marriage. The matrimonial property regime is then dissolved upon death or divorce. There are two main types:
Separation of Assets: each spouse retains full control of their assets.
Community of Assets: assets acquired after the marriage are part of a community. It is possible that the spouses keep certain assets outside of the community. Upon death or divorce, community is dissolved, and assets are split in equal shares between the parties.
Inheritance tax (IHT)
Spanish IHT contrary to the UK Position is paid by the beneficiary and not by the estate. Spanish IHT is due within 6 months of the date of death, however, an extension can be filled for 6 additional months within 5 months of the date of death. Late filing will trigger penalties.
When is Spanish IHT payable?
If one of the following conditions is met:
a) The beneficiary is a Spanish tax resident, in this case he or she will pay Spanish IHT on the inherited assets worldwide. It may be possible to claim unilateral tax relied to avoid paying tax twice on the same asset.
b) The beneficiary is non resident but is inheriting assets in Spain.
Broadly speaking, the amount that has to be paid will be calculated according to the degree of relationship and if the beneficiary is under 21. There are 4 groups in which the beneficiaries are classified: Group I linear descendants under the age of 21. Group II; spouses, ascendants, and descendants over the age of 21. Group III siblings, nephews’ nieces, son/daughter in law. Group IV far more remote relatives (cousins) and unrelated parties. Groups I and II do benefit from more generous allowances. Allowances and tax credits do vary between the regions.
Gifting
In Spain, we do not have Potentially Exempt Transfers, gifts are taxed at the time the gift is made. Again, depending on the region and the relationship between the parties, the rates and allowances will vary.
Certain formalities will have to be complied with to document the gift such as having the gift documented in notarial deed.
If the gift is of real estate, the beneficiary will benefit for the allowances of the region where the property is located. In addition, similarly as the UK, the donor, will pay CGT on the difference on the acquisition price and value at the time of the gift. There will also be a local tax payable known as plusvalia.
If the gift is of money, then it will depend:
a) If the gift is made from Spain to a non-Spanish resident, the rates/allowances will be of the region where the funds had been for the last 5 years.
b) If the gift is made from overseas to a Spanish tax resident, the rates/allowances will be of the region where the beneficiary is a tax resident.
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Buckles, LLP
