Antonio Flores’ Blog

Today I’m going to talk about a case that, without a hint of doubt, will trigger someone into spewing the type of nonsense “that Spanish judges will favour Spanish nationals at the expense of the poor Brits, major investors in Spain and yet victims of a judicial system clearly biased, racist, etc.”

Well, the case is being heard in Tenerife where they also use the word “guiris” (the nick given to any foreigner originally from above the parallel running across central France and typically blonder than Spaniards), but where they have coined an equally derogatory name for mainland Spaniards: “godos”, which derives from “visigodos”, or Visigoths, post-Roman inhabitants of Spain and who originally came from Germany and Scandinavia and supposedly, invaded them many centuries ago.

So going to the “legals” of the case itself, I will mention that it involves the following:

• A deceased British property owner resident and re-married in Spain.
• Children from both marriages, 2 from the first, both British nationals, and a further Spanish national from the last.
• The existence of a Spanish will leaving everything to the Spanish son.
• The absence of property in the United Kingdom but the existence of a few real estate units in Tenerife, under his name.
• And a Spanish widower unwilling to share the estate…

Our clients, both British citizens and children of the deceased, from a previous marriage, and who had been left out of an inheritance they claimed they were entitled to, hired us to study the case and bring an action for the judicial recognition of their right to the estate of their late father.

In application of Spanish laws, but most importantly, pursuant to the findings of a Spanish Supreme Court ruling, it so happened that they had an entitlement, given that, although testators in England enjoy a basic freedom of testamentary disposition (under certain constraints), Spanish inheritance laws stipulate that a “legitim”, or minimum  portion of the estate, should go to the children where the testator was

1. British and
2. had no assets in Spain, due to a complex application of conflict or law rules that involved bouncing the matter to and fro between Spain and England.

Under Spanish provisions, one third should be going equally to all 3 children, and therefore our clients would be entitled, on paper, to 2/3 on 1/3, which works out at 1/9 each. And whereas the deceased’s Spanish widower opposed to sharing, her lawyer saw it convenient to settle with the above figures in mind, be means of a cash payoff.

Their proposal, not negligible given the size of the estate, was argued against on the basis of what was we thought is a sound theory: that the testator had left out his British children on the basis of what he thought right and lawful, under his personal law, but that had he known that Spanish laws also protected his British children in the event of dying in Spain, as a resident and holding only Spanish property, he would have wanted his estate to be bequeathed in equally shares.

And this is the direction of our petition, that they inherit 1/3 each, failing which we will still settle for the lesser portion of 1/9 each. And what about the risk of not settling? Since we filed a “cascade claim”, having the first petition for the higher portion dismissed (and the second accepted), would almost necessarily mean that legal costs would not be awarded: still worth the try I would say!

And what about the ethnically discerning judge? If he is Canarian, he will surely have nightmarish nights trying to choose between a half-Scottish half-Spanish defendant, the latter half originally from Germanic and Scandinavian lands, according to Canarians, and 2 half-Scottish half-Irish claimants, the first half also with substantial “Norsemen” blood, who are the Germanic people who inhabited Scandinavia in the Middle Ages which means that, by reference to blood lineage, we have solved the Judge’s tribal dilemma by boiling it down to a pure dispute between Scandis. Init Your Honour?

Antonio Flores Inheritance, Litigation spanish inheritance tax

Offshore is definitely off. The times of the property owning offshore-based companies are over. The glamour associated with names such as Seychelles, British Virgin Islands, Turks & Caicos etc., has now turned into a stigma. Because there was a time in Spain when, if you went to certain summer cocktail parties or high-flying bashes and you did not own an offshore company based in some fanciful island, you were a nobody. In fact, your lawyer was quickly tagged as unsophisticated, uncreative, in essence, not up to scratch with this new posh trend that was all the rage among the richer.

The Mallorca Provincial Audience (May 2010) has sent a lawyer to jail for almost 4 years and given him a fine or €600K  for setting up a “fiscal engineering scheme to instrumentalise defrauding and money laundering procedures “, in the sale of a property in Puerto Pollensa (Mallorca). In this case, he had set up the structure to, among other aims, avoid (or rather evade) paying Capital Gains Tax (at 35%) on the real price (as opposed to the officially declared) when selling his client’s property.

According to the prosecutor, and the judge in the examined ruling, the investigated  law firm indiscriminately offered offshore companies, via the website offshore.biz site (in which even two Mallorca notaries were mentioned), to their clients with the intention of:

• Minimizing the tax almost to the point of exemption.
• Offering 100% protection to the assets.
• Offering 100% anonymity.

The message this Court ruling has sent out is a very clear one: using offshore companies to hold Spanish property does not entitle the beneficiary to legally avoid payment of taxes in Spain, whether you sell the shares, and alongside it, the property. This applies also to the buyer of the structure, who is not exempt from paying transfer taxes.

The Court Office, in reaching its decision, invoked the following:

• Non-Resident Act 5/2004: Capital Gain Taxes obtained, directly or indirectly, from property situated in Spain, will be taxed in Spain. In particular, the following gains are included: when they are originated or derived from rights or shares of a company, resident or not, which assets are made of up of, primarily, directly or indirectly, property based in Spain. The gains obtained from transferring the shares of a company, resident or otherwise, that attribute its ultimate owners the right of their enjoyment in Spain.
• Double Taxation Agreement between Spain and Ireland of the 18th of November 1986: the gains derived from the sale of property can be taxed where the property is located (for some reason, this was invoked as part of the defence strategy).

In this case, the tax office, assisted by the police, found enough evidence of the crime when they were given authorisation by the court to raid the firm’s premises, in which they found not only crucial information on the transaction (particularly deeds of share transfer and deeds of resignation of director and appointment of new director, both done on the day that the property changed hands, bank transfer slips, etc.) but also a private purchase contract for €875,000 for the property in question, when the price paid officially paid was €425,000.

Finally, the Tax Office’s report puts under serious scrutiny Law Firms that, apart from offering the standard juridical, financial and accounting services, have specialized in the design of schemes and structures of fiscal engineering that are utilized to defraud and launder money. These professional firms, which act as company incorporating agents, don’t have as its object international fiscal planning, but are purveyors of mechanisms for subjective simulation, by inserting physical and juridical persons, national and foreign, in the ownership of the assets they intend to conceal. The mechanisms, according to the Tax Office, are as follows:

1. Incorporation of offshore of property holding companies (offshore-based) .
2. Incorporation of Spanish Companies (mostly Limited-SRL), owned by the above offshore, to manage Spanish property. These companies are merely holding property, having scant bank movements.
3. Appointment of directors different from the ultimate owners, either being the same lawyers that created the structure or, as in the case study, someone paid to do the job (and who has also been sentenced to a jail term, albeit suspended). These persons are also authorised to operate both the offshore and the onshore accounts and are, at times, beggars pulled off the street. 
4. Utilization of the law firm’s clients account to receive and remit transfers, with the intention of a) concealing the true nature of the transactions behind the transfers and b) avoiding compliance with anti-money laundering provisions (thereby making it more difficult to know the real nature of the deal).

As a result of the above court action, the lawyer, the ultimate beneficiary and the director were all sentenced to jail terms, although only the lawyer will have to serve time, for the beneficiary paid up the taxes owed prior to the hearing (€135,000) as well as the fines, and the director was found guilty only of conspiracy to defraud.

Offshore is definitely off, and therefore it would be advisable that anyone willing to sell a property owned by a string of companies opted for not selling the shares abroad, because, not only all the above could easily be applicable, but also whoever was buying them would be buying into problem, unless of course he/she was sitting on a pile of cash he wanted to get rid of…(not advisable anyhow).

It may be interesting to see how this links with this new trend of incorporating UE based companies to avoid Spanish Inheritance Tax, particularly UK based, but will leave the study of this dubious proposal for a separate post.

Antonio Flores Companies, Corporate Law, Inheritance, Property, Taxes offshore companies, spanish capital gains tax, spanish inheritance tax

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.

Antonio Flores Inheritance, Property inheritance tax spain, selling property to children in Spain, selling property to family in Spain, Spanish Inheritance Law, spanish inheritance tax

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…?

Antonio Flores Inheritance IHT Spain, inheritance tax in spain, inheritance tax spain, spanish iht, Spanish Inheritance Law, spanish inheritance tax