The Future of Inheritance Tax Law in Spain

Published on 29/06/2011 in Taxes in Spain

Inheritance and Gift Taxes in Spain: the differences between the Spanish Inheritance Tax (IHT) to be paid in the different regions of Spain (comunidades autonomas) and the National IHT: differences between residents and non tax residents in Spain. Is the Spanish IHT system discriminatory? What lies ahead?

IT IS very common to see articles in the press but especially the press for foreigners living in Spain (expats) mostly British, referring to the Spanish Inheritance and Gift Tax IHT (Impuesto Sucesiones y Donaciones: ISD). The reason is obvious, since this tax can be very high, depending on whether the deceased and his heirs are tax residents in a particular Spanish Autonomous Community or not, if they are Tax Residents in Spain or not, etc.

Our firm has been advising for many years on inheritance tax planning and we have seen with some concern that some people have been advised to set up company structures, which can be expensive to create and maintain, with the aim of preventing future IHT liabilities, when in many cases there was no need to as the potential IHT bill could be minimised with other measures that are much simpler, cheaper and cost effective.

In any case, our aim in this article is to inform our readers, especially those whose future heirs are not tax resident in Spain, that the European Commission has formally requested from Spain a change in the regulation of the IHT, as generally it is higher when the heir or beneficiary is Non Tax Resident in Spain (irrespective of his nationality).

Thus, as stated by the Commission itself, in practice when the rules of the different autonomous community apply to the Inheritance and Gift Tax, the result is that the bill is considerably less than when National or State law applies. And since National or State law on inheritance applies when the beneficiary or deceased do not have their habitual residence for a specified number of years in an autonomous community, in practice this means that normally Non Tax Resident in Spain or Tax Resident in Spain who moved to another community, have to pay more Inheritance Tax or Death Duties than the habitual tax residents in a community for longer time.

Therefore the European Commission concludes that the Spanish Laws imposes a higher tax burden on non-residents and on assets held abroad. The Commission understands that the Spanish regulations are incompatible with the free movement of workers and capital as provided by the European Union Treaty and constitutes an obstacle to free movement of persons and capital in breach of the Treaty on the Functioning of the European Union (Articles 45 and 63 respectively).

Recently a new ‘complementary reasoned opinion’ has been sent to Spain by the Commission after a previous one was sent on May 2010. It should be noted that Spain already made some amendments in this field, but the European Commission still understands that it does not fully comply with the EU Law. So, if there is no satisfactory response, Spain could be referred to the Court of Justice of the European Union.

Our opinion is that the European Commission is correct when it considers that the Spanish IHT laws in practice, if not expressly, are discriminatory. We believe that it will probably be changed quite soon in order to fulfil the European Union principles of freedom of movement and equality.

The same thing happened in the past with the Capital Gains Tax (CGT), when Non Tax Residents paid more CGT than Tax Residents in Spain but after several Court decisions and pressure from the European Union, the law was changed and the CGT tax is now the same for everyone.

This also opens the possibility to think about appealing against the IHT bills to be paid as they could be considered discriminatory, just as previously done with the Capital Gains Tax before the law was changed. This could be an interesting option when the IHT to be paid is very high. If this is your case or the case of someone you know, please do not hesitate to contact us.

The information provided on this article is not intended to be legal advice, but merely conveys general information related to legal issues.

Written by: White & Baos Lawyers

About the author:

White & Baos is a law firm established by Spanish and UK lawyers, and is regulated by the Law Society of England & Wales as well as the Spanish regional equivalent, the Colegio de Abogados in Alicante.  They are one of Eye on Spain's few recommended lawyers.

Calle Diana No. 19. 2º-D, 03700 Denia, Alicante
Tel.: +34 966 426 185
Fax.: +34 965 784 471

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Steve Riches said:
07 November 2011 @ 10:02

I am getting lots of e-mails from 2 law firms in particular trying to get me to put my Spanish property into a UK company of which I would be sole director. The costs quoted for this are £5,000+, also a one-off fee to the Spanish government, and an ongoing annual UK cost to maintain the company (ie. the Spanish property).
I am told that the Inheritance tax for my wife if I die could be 40%, to be paid by her immediately to the Spanish Gov't.
The property is worth well less than
£180,000, has never been let, and has a long track record of all taxes etc. paid for 20+ years. We use it just for holiday use.
I suspect that doing what the law firms recommend merely is good business for them and that any saving for me or my heirs is grossly overstated. I realise you all are after business, which is probably why your site does not specify properly how other methods of avoiding swingeing Inheritance Tax can be used. I am most interested to read that the European Commission may soon force a change to the current situation.
Come clean on your website and set out clearly the alternatives along with you costs for doing so.
I know no other industry where the cost of a service product is so shrouded in complete gobbledegook.

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