Real Estate Agencies: A Legal Perspective
When does inheritance tax become a problem?
Spanish laws differ between regional community, but there is a main legal body which governs the application of tax (Ley de Impuesto de Sucesiones – Inheritance Tax Act) and a number of specific deductions depending on where the inheritors are residents for tax purposes and their age (pursuant to 21/2001 Fiscal and Administrative Measures Act).
Basically, IHT is calculated on the basis of a number of variables, namely value of assets being transferred, family relationship between giver and receiver and pre-existing wealth of the latter. Deductions are based on the age and residency for tax purposes status of the inheritors, on the consideration of habitual domicile of the property inherited (between spouses) and also miscellaneous expenses (funeral etc.).
In order to simplify matters we have created an IHT calculator to enable you to know your liability as of now, and on the following paragraphs we explain who best to avoid it. Keep in mind that IHT can go up, in specific situations, to 81% of the value of the estate!
What do we propose then?
Depending on several factors, it is of paramount importance to find a legal method to minimise IHT with as little cost as possible thus making it worth the while. We will set forth a number of options, indicating costs of inheritance in normal circumstances versus cost of alternative propositions, whether they are arranged before completing or after. In all cases, there is a presupposition that elders pass away before and we therefore presume that their inheritors will survive them.
Option 1: Buying jointly with future inheritors
This option has the advantage that it does not require any special arrangements to be in place prior to completing, making it a straight purchase, and IHT is reduced in the proportion of the ownership share.
Disadvantages: If the inheritors do not have enough financial means to prove their capacity to purchase the property the Spanish Tax Authority could raise a tax bill in concept of gift, which can be higher than the IHT we are trying to avoid. This situation, albeit unlikely, can be avoided by transferring the funds to the inheritors in the UK to make it subject to UK tax laws and availing therefore from the deductions therein envisaged.
Another disadvantage is of another nature: does everyone wish to have their properties in their children's name, losing control of it? Even though this is not strictly a legal issue the concerns raised can be addressed by operating a variation of this option: splitting ownership into bare ownership and life interest. This sub-option enables the real owners to retain an interest during their life as if the property was fully owned by them. It can be used, rented out and even modified, but not sold. The bare owners can only use it with the permission of the beneficiaries of the life interest, and on death of the formers the inheritance will be calculated depending on a scale.
Costs: No additional costs.
Savings on IHT: The reduction on IHT can be calculated by using IHT calculator with the value of the property share left. If ownership is split between the person wishing to mitigate IHT and potential inheritors, a table is used to calculate IHT on the value of the residual value ownership.
Option 2: Selling the Property to Future Inheritors
If the property is already owned directly by the person wishing to mitigate IHT, they can sell the property to the potential inheritors, either fully or partly.
Disadvantages: Same as in Option 1.
Costs: 7% Transfer Tax on the value of the share transferred, and 35% Capital Gains Tax, if a profit is declared on the deeds. In any event, 5% of the share value sold will have to be lodged with the tax office on account of Cgt, but can be claimed back if there is not profit.
Savings on IHT: The reduction on IHT can be calculated by using IHT calculator with the value of the property share left. If 100% of the property value is transferred no IHT is applicable.
Option 3: Taking out a mortgage loan on the property
This option is interesting in that it allows a reduction on the value of the property for tax purposes, mitigating the liability accordingly. Such an operation requires that the equity released from the property is placed in some form of tax haven in order to avoid it being taxed.
Disadvantages: It does not fully mitigate IHT liability as most banks will only lend up to 70% of the property valuation, but it can be combined with other options. Also, this option requires that the property owners are not over a certain age (65-70 years is considered the maximum age limit to be eligible for a loan) and is subject to the vagaries of individual life expectancy, as an optimal IHT mitigation requires the loan to be fully owed when death occurs (it would be necessary to top up the loan amount every year and this may not always be possible, especially after a certain age).
Costs: Approximately 3% of the equity released.
Savings on IHT: Up to 70% (amount of the mortgage not yet repaid)
Option 4: Buying or owning through a Spanish Limited Company
This is becoming a very attractive form of minimising the effects of IHT if certain steps are taken. By virtue of article 108 of the LMV (Ley de Mercados de Valores) Act, company shares can be transferred with no transfer tax associated to it provided that none of the acquirers take control of the company (no more than 50% of the shares) and that one year has passed from the act of incorporation of the company or the transfer of the property to the company if this happens after the act of incorporation.
Many property owners are availing of this structure to avoid IHT by effecting the sale of the shares to their inheritors before death. Such a sale is not susceptible of being taxed as a gift. If more anonymity is required, the sale of the shares can take place via a UK Notary Public, and further legalised with the Hague Apostille.
Disadvantages: Company running costs of aproximately 2,400 € yearly.
Costs: Incorporation of company: 1,500 Euros.
If the property is already owned by the person wishing to mitigate IHT, Transfer tax at 1% of the share of the value of the property transferred to the company is applicable.
Savings on IHT: 100%
Option 5: Buying or owning through a EU company.
This option is also interesting in that the transfer of the shares after death takes place in the country where the company is domiciled, thus preventing the Spanish authorities from obtaining this information.
IHT may be, however, an issue in the country where the company is domiciled and therefore it will be necessary to clarify the tax position in the country.
Disadvantages: Regard will have to be given to the tax position on the country of residency in order to establish IHT liability there.
Costs: Cost of incorporation of company: Depending on jurisdiction and provider of the service. If the property is already owned by the person wishing to mitigate IHT, Transfer tax at 1% of the share of the value of the property transferred to the company is applicable.
Savings on IHT: 100%
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