Double Taxation of IHT in England and Spain
Spanish Governments are not celebrated for bringing clarity to the matter of inheritance taxes (IHT), whether on a domestic level –there are 17 different IHT tax regimes within the country- or internationally, in the very relevant cross-border investment context.
Notably, Spain has only signed agreements to avoid IHT double taxation with Sweden (1963), France (1963) and Greece (1920), rather bizarrely. If you think about it, a country that is trying all sorts to lure foreign investment, yet fails to specifically address the IHT situation of an investor from Britain (by and large the largest exporter of property buyers to Spain!), is a country with massive inefficiencies.
Spain signed its latest Double Taxation Agreement with the United Kingdom on the 14th of March 2013, entering into force in June of 2014.
As far as Spain is concerned, the treaty is meant to cover the following:
income tax on individuals; (ii) the corporation tax; (iii) the income tax on non-residents; (iv) the capital tax; and (v) local taxes on income and on capital;
Yep, no trace of inheritance taxes, as if the thousands of British investors in Spanish property were immortal or this was a point of (tax) law that nobody ever asks or worries about. Paradoxical and incomprehensible.
Still, however, national laws in each country provide the solution:
In Spain, a rather unknown binding resolution of the Spanish Directorate for Taxes, with number V0148-08, applies the 1987 Spanish Tax Act to address the a scenario of double taxation of a Spanish resident who inherits from a UK resident (where the estate is taxed). In this case, the resolution establishes that any taxes paid in the UK will be deducted off the taxes to be paid in Spain (if those UK assets are at all declared in Spain!).
What if it was the other way round i.e. a UK domicile inheriting a Spanish property? In this instance, as Spanish taxes will be paid on local assets, according to the site https://www.gov.uk/inheritance-tax-double-taxation-relief, HMRC gives credit against Inheritance Tax for the tax charged by another country on assets sited in that country. Interestingly, the web page cites an example of Spanish-based property and the “relevant double taxation convention”…when there isn’t one!
So whilst there is an understanding as to where and how will IHT be paid where assets of Spanish/UK residents are involved, surely it cannot be too difficult to sign up a treaty on the matter for complete clarity, just as the wholly superfluous 1920 Double Taxation Agreement with Greece does.
Hello Antonio
I have been looking further into this as we own a property in Spain and I wanted to do some IHT planning.
Because there is no double tax convention with Spain covering IHT, HMRT in the UK give what is called unilateral relief to UK tax residents for tax charged by another country on assets sited in that country. So in theory there is a credit allowed for tax chargeable on a spanish property against any UK IHT chargeable.
The problem I can see is that in Spain there is no exemption from IHT between husband and wife as there is in the UK. Most UK wills would provide for the remaining spouse to inherit everything on the first death and IHT would not therefore become payable until the second death, when assets would be passed on to heirs. As tax will be payable in Spain on the appropriate share of the property on both the first and second deaths, it is not clear to me whether the unilateral relief will allow the tax payable in Spain on the first death to be recovered against the UK IHT due on the second death. Fairness would dictate that it should but as we know tax is not always fair. I can find no information on this on the internet. Do you have any insight into this point?
Thank you
Hello Helen,
Your assessment in respect to paragraph two is correct. There is no DTA provision in respect to IHT between Spain and the UK.
With recent changes in the law pursuant to a ruling of the European Court of Justice, as a EU resident you are eligible to the same allowances residents enjoy. Therefore, to be able to respond fully to your query we need to know where in Spain do you have your assets as each region has a different tax treatment. This said, I will add that most regions have introduced significant allowances in kinship inheritance situations, for example Andalucia, where an inheritor within the first grade will be exempt from tax if the estate received is less than 175,000 Euros.