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Scope of tax 

Spanish inheritance tax (or gift  tax) is payable if:
The inheritor (i.e. the recipient of a gift or the heir of an estate) is resident in Spain, or

The asset being gifted, or passed on death, is property in Spain

To put it another way, Spanish inheritance tax is not payable if assets are outside Spain and the recipient is also not resident in Spain.

Husband and Wife and Spanish Inheritance Tax
There is no exemption to Spanish inheritance tax between a husband and wife where they are both resident in Spain. Where they are both resident in Spain and, for example, the husband dies, then the estate left to his wife is fully liable on the worldwide assets of the husband.

If the couple are living together unmarried, the tax due is even more. Anything over €15,956.87 is liable to Spanish inheritance tax on the death of their spouse or partner, assuming all assets pass to the spouse.

Gift or Inheritance Tax Rates 2002

Euro from Euro to Tax Rate Tax Payableat top of band
Nil 7,993.46 7.65% 611.50
7,993.46 15,980.91 8.50% 1,290.43
15,980.91 23,968.36 9.35% 2,037.26
23,968.36 31,955.81 10.20% 2,851.98
31,955.81 39,943.26 11.05% 3,734.59
39,943.26 47,930.22 11.90% 4,685.10
47,930.22 55,918.17 12.75% 5,703.50
55,918.17 63,905.62 13.60% 6,789.80
63,905.62 71,893.07 14.45% 7,943.98
71,893.07 79,880.52 15.30% 9,166.06
79,880.52 119,757.67 16.15% 15,606.22
119,757.67 159,634.83 18.70% 23,063.25
159,634.83 239,389.13 21.25% 40,011.04
239,389.13 398,777.54 25.50% 80,655.09
398,777.54 797,555.10 29.75% 199,291.41
Over 797,555.10 34.00%  

Gift & Inheritance Tax Multiplier
Euro (Net Worth of Donee)   Group 1 Group 2 Group 3
From To      
Nil 402,678.11 1.0000 1.5882 2.0000
402,678.11 2,007,380.43 1.0500 1.6676 2.1000
2,007,380.43 4,020,770.98 1.1000 1.7471 2.2000
Over 4,020,770.98 1.2000 1.9059 2.4000


Group 1:
children, adopted children, grandchildren, spouses, parents, grandparents
Group 2: cousins, nieces, nephews, more distant relatives & descendants & ascendants
Group 3: all others including unmarried partners

The following table assumes that the heir’s estate is under €402,678.11

Gift & Inheritance Tax Multiplier
Euro Estate Tax Payable - Married Tax Payable – Unmarried(No €15,957 exemption)
50,000 3,083 9,898
100,000 9,838 24,831
200,000 28,250 63,282
400,000 76,898 162,038
750,000 180,397 370,288
1,000,000 262,697 536,245
2,000,000 602,697 1,216,245
5,000,000 1,622,697 3,256,245
10,000,000 3,322,697 6,656,245


It should be noted that, if the wife in her own name is worth more than €402,678.11 the tax payable is, in effect, increased by as much as 20%. Note also that this tax cannot be offset against any UK inheritance tax. There is nothing to offset against where both husband and wife are UK domiciled, since there is no UK tax payable (just Spanish tax).

Finally, there are no exempt limits for gifts in one’s lifetime; it is all taxable. However, in practice, of course, normal gifts are not taxed. Moreover, it is very much Spanish practice that any property such as furniture, pictures, etc. which is not registered (ie, most assets excluding property and cars) are given away, and no-one in Spain would file a gift tax return in such circumstances.
An Example of Spanish Inheritance Tax.

Each child inheritor can claim the standing deduction of €15,956.87. For example, if a flat or small house worth €80,000 is left to four children equally, each child inherits €20,000. Each adult child can then deduct the standard amount of €15,956.87, leaving €4,043.13 each liable to Spanish succession tax. The heirs would pay less than €309.30 Spanish succession tax each. Note, however, that the deceased is a UK domicile, the Spanish assets remain liable to UK inheritance tax, and all assets in excess of £255,000 are liable to 40% tax. Any tax paid in Spain can be deducted against the UK tax liability to avoid a double tax charge.

Responsibility to declare the death to the Hacienda
On the first death, the surviving spouse has six months to inform the authorities and pay the tax. There is an extension of up to six months obtainable by application within the first five months and this extension is deemed granted if no reply is received within one month. Note that if this is not done, and the title deeds (escritura) to the property remain in the deceased’s sole, or joint name, then it cannot be sold. There are also heavy penalties and interest for non-payment of the Spanish inheritance taxation on time.

Spanish Inheritance Tax Rates
Spanish inheritance tax is payable by the recipient. The actual tax rates payable are based on:

The relationship of the recipient to the donor (or deceased), and
The wealth of the recipient prior to the transfer (“pre-existent net worth”)

The highest real rate of tax is just under 82% on this basis, though before any multipliers the rate stands at 34%.

Exemptions and Deductions
There are some important exemptions:

1. The surviving spouse, and each closely related inheritor (descendants, spouse, parents and grandparents), has an exemption of €15,956.87. This applies to each inheritor, not the total estate.

So if an estate is valued at €63,82.48 and is left equally divided among the spouse and three children, each will receive €15,956.87 and there will be no tax.

2. In addition, an inheritor in direct line of descent (children, including adopted children, and grandchildren) under the age of 21 have an exemption of up to €47,858.87, depending on their age.

3. There is no exemption for people who are not related or are related very distantly to the deceased. Moreover, those who are related but not closely, such as cousins, nephews and nieces, have a lower exemption of €7,993.46.

4. Your house would be virtually exempt from Spanish inheritance tax if the following conditions are met:

The deceased was a tax resident of Spain
The beneficiaries are either the spouse or children or relative over 65 years of age, and they have lived with the deceased for the two years before death
The inheritors continue to own the property for 10 years from the date of death
Assuming these conditions are all met, the value of the house is reduced by 95% in calculating the tax base liable to the succession tax. It is not a reduction of the tax payable, but a reduction in the taxable base. The maximum reduction is €122,606.47 for each inheritor. The exemption is only against the home (and can be applied to shares in a family business), but does not apply to investments or second homes.

5. Divorce usually avoids gift tax

6. A 95% reduction in inheritance and gift tax liabilities on family businesses. The business must be kept for 10 years following the death of the individual.

Overseas Taxes on Gifts or Inheritances
Where an overseas gift or inheritance tax is actually paid, this overseas tax is deductible against any Spanish tax liability. This is a general rule. However, if the overseas tax rate is higher than the Spanish rate the Spanish authorities will not provide a refund of the difference.

Common Law Spouse
Spanish law does not recognise a common law spouse. They have no standard allowance, and are taxed at the highest rate on inheritances (double the rates which apply for a spouse) as they are treated as non-relatives.

Similarly, under UK inheritance tax law, the spouse exemption does not apply. Sometimes, the best and simplest advice that can be given in these circumstances is to consider marriage.

The Usufruct
Most people in Spain leave their widow or widower an usufruct, which is a life interest, in the family house, rather than leave them half of the property. This can reduce Spanish inheritance taxes.

By leaving the spouse an usufruct, ownership of the house can pass to the children. The usufructuary (the life interest holder) can live in the property free for the rest of their lifetime. This device saves a lot of inheritance tax, as the following three examples demonstrate.

Life interests (usufructs) and reversionary interests
The ownership of any asset in Spain can actually be divided into two parts: a ‘life interest (usufruct)’ and a ‘reversionary interest’.

For example, consider the ownership of a villa. Mr Smith could own the entire villa outright, and then decide to give his only son the reversionary interest in the villa, while creating a ‘life interest based on his own life’ (ie, Mr Smith senior) and keeping that for himself.

Thus Mr Smith senior now does not own the villa outright; instead, he owns the right to live in the villa rent-free for the rest of his life. Similarly, his son, while owning the reversionary right to the villa, does so subject to the fact that his father, who owns the life interest in the villa, has the legal right to remain in the villa for his lifetime. When Mr Smith senior dies, the son’s reversionary right will no longer be subject to the life interest, and so the son in effect will then finally own the villa outright. In this example, Mr Smith had only one child. Had he had three children, he could have passed over the reversionary interest to the three of them equally had he chosen.

Because the transfer of a reversionary interest is a gift, it has to be valued for tax purposes. There may be some Spanish gift tax payable on creation of the reversionary interest (note that there are no exempt limits on a gift in one’s lifetime). How does the tax man value such an interest? It is obvious that a reversionary interest of a villa with a 103-year-old tenant is much more valuable than the same villa with a 48-year-old tenant.

Assume, for example, that the life tenant is 60 years old and that the value of the villa with vacant possession is €80,000. The formula works as follows:

1. Take age of live tenant (60) and deduct 20 (this is fixed) = 40
2. From the fixed 70% base rate deduct the result of the above (i.e. 40) = 30%

30% of the freehold value of €80,000 is €24,000.

The formula above has now calculated that the value of the life interest as €24,000. Therefore the reversionary interest must be €56,000 (€80,000 less €24,000).

There are two exceptions to the application of the formula. Firstly, however old the life tenant, the value of the life interest can never be less than 10% of the open market vacant possession value. Consequently, the value of the reversionary interest cannot exceed 90%. Secondly, if the life tenant is less than 20 years old, the value of the life interest cannot exceed 70%, and consequently the value of the reversionary interest cannot be less than 30%.

What happens if the surviving spouse wants to sell the property?
The surviving spouse would only have a life interest in the property. Theoretically, this could be sold as an independent transaction. The new purchaser would buy the right to remain within that property as long as the surviving spouse lives.


As you can imagine, there is not much of a market for this asset.

The children could independently sell what we would call the freehold. In Spain they refer to this as the bare value. There is a better market for such an asset, as it is an appreciating one, whereas the surviving spouse’s life interest is a depreciating asset.

In practice, the children and surviving spouse would sit down together and agree between themselves what to do. They would probably sell the entire property, and purchase a new one with the children continuing with the freehold interest and the surviving spouse with the life interest. As you can see, however, the surviving spouse cannot make such a decision independently of the children. She (he) will require the children’s acceptance. If the children are under 18 years of age, the surviving spouse would need to seek permission from a judge to sell the property.

Spanish inheritance tax savings: examples
The examples are based on a house worth €80,000 and assumes, for simplicity, that it is the only asset of the estate. The possible 95% reduction is not taken into account (see earlier CGT Exemptions and Deductions, point 4).

Example 1: House in husband’s name – tax payable: €6,809.56

Assuming the husband dies leaving the home to his wife:

Value of house €80,000.00
Group 2 deduction (€15,956.87)
Taxable €64,043.13
Tax payable €6,809.56

Example 2: House in joint names – tax payable: €2,043.05

If instead, the house was in joint names, then the calculation is different:

Value of 50% interest €40,000.00
Group 2 deduction (€15,956.87)
Taxable €24,043.13
Tax payable €2,043.05

Example 3: House in joint names with usufruct and three children – no tax

If instead the house was in joint names but the husband left his wife with a life interest, after which time it passes to the three

children equally, there is no tax to pay.
In this example, on his death the husband leaves:

A life interest in 50% of the house to his wife
The title to the same 50% to his children (subject to the wife’s life interest)
If the wife is 59 years old, the value o the wife’s life interest is 30%, and the children’s reversionary interest is 70%. The tax calculation is:

  Wife Children
Interest left Life interest Reversionary
Respective values 30% 70%
50% value from husband (€40,000) €12,000 €28,000
Spouse deduction (€15,956.87)  
Children’s deduction (3 x €15,956.87)   (€47,870.61)
Taxable Nil Nil

Conclusion
Thus, by the husband and wife having the home in joint names, and by their Spanish will leaving a life interest to the other, with the ultimate ownership to the children equally, there is a reduction in Spanish inheritance tax.

A Note on Transferring Property Ownership between Spouses
If a couple purchases a property jointly, and one wants to transfer their half of the property to the other, it is not necessary to actually do so in the conventional method. Instead, the couple can dissolve the ‘community’ keeping the property in the name of just one of them, thus paying only 0.5% transfer tax instead of 6%.

See also

Residency
Scope of Spanish Tax
Spanish Income Tax
Spanish Wealth Tax
Spanish Capital Gains Tax



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