Spanish inheritance tax - USERNAME: Ray - 28/01/2013
Tax Question:
A UK resident woman bought a holiday apartment in Tenerife some years ago for 140,000 euros. Current value is probably the same. She has a Spanish Will in which she leaves the apartment to her 2 UK resident sons but has now been told that on her death there will be Spahish Inheritance Tax to pay. Is this correct and if so can you advise how much it may be? Is there anything can be done to avoid/mitigate this? If she gave the apartment to the sons whilst she is still alive would there be any Spanish taxes to pay whether Inheritance Tax or any other?
Answer:
Each Spanish autonomous Government has the power to amend the inheritance tax/gift tax rules for individuals resident in their autonomy. Non-Spanish resident individuals who inherit Spanish situs assets are not able to benefit from the gift/inheritance tax exemptions which apply to resident individuals. This results in less favourable tax treatment for non-Spanish resident individuals as compared with Spanish residents and for this reason Spain's Inheritance tax and Gifts tax laws have been challenged in the European Court of Justice (ECJ) on the grounds of discriminating between Spanish and non-Spanish resident individuals.
Although it is quite clear that the individuals in question are non-Spanish tax residents it is worthwhile mentioning as there will probably changes in due course to Spanish Inheritance/Gifts tax.
As your question revolves around non-residents, I will quickly give you a very basic summary of the national inheritance tax/gifts tax rules. In Spain the heirs are the taxpayers and the starting tax rates (on a sliding scale) are from 7.65% to 34%. If the children as heirs are not wealthy in their own right then these % remain the same (they can be further increased if inherited by a non relative or by a wealthy individual).
Assuming there is no further % increase, then each child would inherit half of the €140,000 (i.e. €70,000 each), both benefit from an allowance of just under €16,000 therefore giving a taxable base of €70,000 - €16,000 = €54,000 to be applied by the inheritance tax rate scales.
This generic example is just so you can get an idea of the mechanics of the calculation, but I would need more information from you in order to give you a more detailed and tailored answer.
If the mother decided to gift the property to the two sons she would be liable to Spanish Gifts tax, (this is lifetime inheritance tax without allowances) which would result in a higher tax bill than under the inheritance tax.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.