Following my previous post in which I briefly described the common pitfalls of non resident inheritance planning, in this post I will analyse a bit more in detail the first point: what involves selling your property to your children.

The sale of property by the parents to the children is called in Spanish law (presumably also that of other countries’) a “simulated” sale, which means that it is not real, normally for one (of all) of the following reasons:

1. Lack of proof of payment of the purchase price: this is an obvious conclusion and needs little explanation: if no money has changed hands then no sale has happened.
2. Lack of financial capacity to acquire property or assets (this is typical of children or people with no known occupation).
3. Low or unreal price: This indicative fact is normally assessed in conjunction with others, such as the one below.
4. Relationship between seller(s) and buyer(s): This is also an indicative fact to conclude that there was no intention to really sell a property.
5. The “seller” remains in control of the property, what is called in Latin legalese, retentio posesionis.
6. Reformations made by the “seller” on a property which no longer belongs to him. According to existing case-law (and logic), this openly defies the rules of normal human behaviour for nobody would spend substantial sums in someone else’s property, nor (according to these rules, and the judge) nobody would consent someone else to make reformations in his own property, without a contract of some type

Because a “simulated” sale is null and void, the transaction can be challenged by the Tax office, other inheritors or creditors. The consequence of this happening is that the transaction could be classed as gift (donation) and taxed accordingly, which implies that the gifter has to pay Capital Gains Tax in addition to Gift Tax paid by the beneficiary, which is the same as IHT but without applicable allowances, certainly not a nice situation to be in!

As an example, if a €240,000 property was sold “illegally”, that is, with no consideration, to a child or to a friend (higher tax scenario), and it was successfully proven that it was a simulated sale, then applicable taxes would be of €40,000 and €90,000 respectively!

A variation of this would be where the funds are given to the children who then buy the property. This, in itself, is a gift, but it does not necessarily have to take place in Spain (true for non residents). Residents, on the contrary, are subject to Spanish tax rules and regulations.

A few weeks ago I was met with an inheritance tax problem enquiry from an elderly lady who had a flat in a Benidorm tower building which she had purchased back in the seventies.

She told me that she had been approached by a company (did not disclose the name) offering her to put the property into a company so that the inheritance problem went away. As I found the enquiry rather strange I decided to make some research into this new proposal. When “googling” IHT Spain, I came across a company called Wincham Consultants Limited. The opening line was somewhat exciting and the following phrase caught my eye instantly:

“Wincham supply a service that we believe is the only legal way of truly safeguarding your assets against inheritance tax”. 

To my surprise, that service was the only legal service they were providing (other services included selling houses, renting cars and sourcing cheap flights). Well, this one and only service is no other than setting up a UK company and transferring the property to it.

Further on, I clicked on for more information and arrived at a specialized website in inheritance tax, www.winchamiht.com, whose only service in respect of this tax was, again, setting up UK companies. The opening pitch certainly scares the hell out of anyone:

“SPANISH PROPERTY OWNER? When the time comes…Your heirs WILL be hit with a 40%+ Inheritance Tax Bill unless you act now to protect your legacy” 

Which is another way to say:

SPANISH PROPERTY OWNER, when you pop your clogs you better have hired us because otherwise your children are going to be truly f****d!!

You see, the problem with these type of companies offering one single service is that any other alternative you come across is quickly dismissed with, at best, harsh negative criticism and at worst, untrue statements. The word impartiality disappears like sand slipping through your fingers and you never get the true picture.

Inheritance tax planning is a fairly complicated matter because each case is different. In other words, no solution is full-proof and certainly using a UK company is possibly the last best if not the worst. So when reading Wincham’s statements I could not but pick a few out and comment on them:

1. Wincham IHT claims that IHT in Spain is 40% +. The truth is that according to a most recent survey, the average IHT bill paid in Spain in three consecutive years has not been higher than 13% (per inheritor), on the taxable base (which rarely is the value of the property).
2. Winchan IHT claims that “your husband and wife will NOT be exempt from IHT”. The truth is that approximately 300,000 UK citizens residents of Spain may be exempt of IHT in respect of 95% of the value of the property when they inherit from their spouses, just like the rest of Spaniards!
3. Wincham IHT claims (FAQ number 14) that in terms of IHT the recipient of the UK company IS technically liable but subject to BPF (Business Property Relief). They then say that there are a number of rules surrounding this circumstance but that assuming that BPF is applicable then there would be no IHT. Good Christ!! This is like saying that if IHT disappeared altogether there would be no IHT, or if the planet world exploded then you would not have to worry either! The truth is that, for all it matters, BPF is ONLY applicable to relevant business property which is used for the purpose of, you guess, doing business, and this leaves out companies dealing in land or building companies making or holding investments (not to mention holiday homes). I am aware that the UK HMRC is now looking into claims for BPR very closely and in fact these are being sent to a department called Technical Team (Litigation) for detailed consideration. I cannot possibly see how the inheritors of our 82 year old expat living quietly in a 9th floor flat in Benidorm are going to get through the merciless Revenue & Customs officials when these get grab of the file. In summary, I would think that only a few properties could really qualify for BPF and even if they qualify it has to be pointed out that BPR is easy to lose… often at a time when IHT planning is most crucial.
4. Winchan claims that transferring ownership of a property from an Offshore company to a UK company will also completely remove Spanish IHT (FAQ number 17). The reality is that having property in an offshore company is possibly the most inheritance-tax efficient set up one can have so I cannot see why would some want to switch to one of the less inheritance tax-efficient set up.

To summarize, proposing only ONE system to minimize or mitigate Spanish IHT is in my opinion not sound advice. Inheritance tax can be reduced, avoided, evaded or even paid, as the case may be, and tools to achieve these may involve offshore companies, onshore companies, taking out mortgages, keeping quiet for 4 years and 6 months from the date of death of the testator (option chosen by some clients so as to have the tax obligation “timed out” under statute of limitations) and sometimes even incorporating UK companies, and only if a UK qualified accountant (ACCA or equivalent) signs a letter saying that no IHT is applicable in the UK.

The verdict I gave to our test-case Benidorm distressed lady, who wants to leave the property to 4 inheritors, was to draw-up her Spanish will and relax. And in respect of IHT? Well, do absolutely nothing because her €300K property would be transferred to her 4 children for a mere €5,800 per inheritor, or €23K in total, in application of the Spanish Inheritance Tax Act. Fees for setting up a UK company plus costs, taxes and miscellaneous were quoted at around €7,000 to which one would need to add transfer tax (€20,000), which means that this proposed scheme was rather more pointless and even counter-productive than essential.

So Wincham, don’t you think it’s all Much Ado About Nothing…?

It has been widely believed that British citizens who own property in Spain will invariably be subject to UK law, which determines freedom of disposition of assets, as opposed to the more restrictive Spanish inheritance law where children will get 2/3 of the estate and the spouse the life interest of one third (and who may not be the preferred choice of the testator/testatrix!).

The reason for this is that under Article 9.8 of the preliminary title to the Spanish Civil Code, succession to all property, whether movable or immovable and wherever situated is determined by the law of the deceased’s nationality, in our case, English law, which takes relevance but surprisingly, it conversely stipulates that for property located abroad it will be the laws where the property is located which are to be applied. And in Spain forcible inheritors will almost always challenge a will if they don’t receive what they are supposed to get according the Spanish Civil Code, unless of course there are more debts than assets!

The above legal quarrel between both legal systems is now resolved so that if a British testator dies in Spain and:

• has moveable assets and property only in Spain then Spanish law applies.
• has property in the UK and Spain then UK law applies.
• has movable assets in Spain only then Uk law applies.
• has property in Spain and assets in the UK (but not property), then Spanish law applies.

It normally happens that if no inheritor challenges the application of UK law, which is normally typed into the will as the governing law, it will apply regardless of the above.