Readers / visitors to the forum may find the article below of some assistance vis-a-vis IHT. I wrote it earlier this year for a magazine and it addresses the situation in the Valencian Community.
Glyn Moran
KEY CHANGES IN SPANISH TAXATION – PART II – INHERITANCE TAX AND LIFETIME GIFTS
By Glyn Moran LL.B. (Hons), Partner
Continuing with same theme as last month, in this edition of Viva! we look at the recent taxation reforms which have taken place in the Valencian community with respect to Inheritance Tax (IHT) and Gifts or Donations.
The editorial in the national Spanish newspaper ABC in February described the reforms to IHT and lifetime gifts as “a brave decision, rightly guessed, just and modernising of our taxation system”. Whether this is necessarily true is a matter of opinion but in essence this captures the sweeping nature of the changes which have been enacted.
As a general rule tax is payable where the beneficiary is resident in Spain or in the case of a non-resident individual, on the receipt of assets sited in Spain. Nationality has no effect whatsoever, one must simply determine residency and look to where assets are located. In addition, unlike the UK – where the estate of the deceased is subject to taxation – in Spain the beneficiaries who inherit are themselves liable.
Whether these new changes will have a dramatic effect on many readers is a matter of debate but certainly on the face of it they look appealing. Put simply, as a result of the reforms the tax free allowance has been extended to 99% for dispositions between resident spouses, descendants, ascendants and close relatives (Groups I and II). Inheritance Tax has been progressively eliminated in the Valencia Community since 2004 and these new provisions are a culmination of this trend. Indeed, they are also reflective of a growing national tendancy throughout the various autonomous communities to eliminate IHT.
In addition to these changes, a 99% tax free allowance also applies to gifts to children and adopted children of whatever age, natural parents and those parents who have adopted. However, this tax free allowance only extends to €420.000 and in order to take advantage of the new regulations you must not have existing wealth exceeding €2 million.
Fundamentally these are national taxes but responsibility and competence are devolved to each autonomous community to regulate in this field. When dealing with Inheritance Tax the applicable regulations that apply are determined by the habitual residence of the deceased whilst similarly in respect of donations one looks to the residency of the donor, save that in respect of Real Estate it is determined by the physical location of the property. As such, this clearly has practical implications in view of the differing rules that apply in each Community.
From a practical perspective it is expected that the change to IHT alone will benefit up to 49.000 residents of the Valencian Community annually generating a tax benefit of up to €152 million. In tandem with this, changes to the tax treatment of gifts or donations between parents and their children and children to their parents are expected to benefit some 9.000 Valencianos.
However, importantly when considering the practical affect of these changes on an individual basis residency will be paramount. As a result this will undoubtedly have significant implications for non-Spanish nationals living in the Valencia Community. Fundamentally this is because in the context of the changes to IHT both the deceased and the inheritor or inheritors must be resident in order to take advantage of the extensive tax break which is now in place. For dispositions between resident spouses it certainly carries distinct advantages and brings Valencia very much in line with the position in the UK. However, self-evidently parents naturally look to safeguarding assets beyond their lifetimes. As such, virtually tax exempt dispositions between couples fail to address the more fundamental question of how their loved ones can inherit in the most tax efficient manner. Moreover, the residence considerations that apply to these new rules will almost certainly exclude a large majority of UK nationals whose intended beneficiaries – principally their children – remain resident in the UK.
For this reason, in the context of the large ex-pat community in the Valencia region it is somewhat misleading to accept these as “just and modernising” changes because in actual fact they may have little practical benefit to many. Certainly on paper they represent a significant tax reform but it is likely that they will principally benefit Spanish nationals and their heirs. As such, well considered inheritance tax planning remains as relevant as ever to avoid your beneficiaries paying more than they should.
If you wish to discuss the above or any other related matter then please feel free to
contact myself or my colleague Nick Carter MLIA (Dip) SoFA on +34 966 472 660 / 699 838 795 / or alternatively e-mail us at info@legalandfiscal.com
© Glyn Moran LL.B. (Hons)-. All rights reserved.