Inheritance Tax: A Cynical Approach (A Blog Reply)

Dear Readers,

I am a Director of Wincham Consultants Limited and a Spanish Tax Consultant so I have made this post as I have read the Blog on this website found here http:// www.marbella-lawyers.com/blogs/ written by Antonio Flores about our service which we offer to help safeguard against Spanish Inheritance Tax. As I believe I am unable to make a Blog myself I have posted my replies below in BOLD.

He says 'A few weeks ago I was met with an inheritance Tax problem enquiry from an lady who had a flat in a Benidorm and she told me that she had been approached by a company offering her to put the property into a company so that the inheritance problem went away'

To my surprise that was the only legal service they were providing. Further on, I clicked on specialized website in inheritance Tax, www.winchamiht.com

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). This then means 13% per inheritor so if 3 inheritors of one asset then it could total 39% of the asset value in Spain, could it not. The maximum Spanish Tax Free allowance that any individual receives when inheriting an asset in Spain is only 15,957 euros and that is for a Husband & Wife or direct children over 21. The figures that we mention on our website for Taxation on death are between 7.65% to over 80% and we do not make them up as we use the Tax tables available from the Hacienda in Spain. The rates are affected by the value of the inheritance, the relationship of the deceased and pre-existing wealth in Spain owned by the inheritor. This can have a multiplier effect of up to 2.4 the rate. If anyone would like a free Tax liability calculation for their current situation then you can apply for this at the website of www.winchamiht.com

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. So what about the rest of the world who own property in Spain as this is not a problem just for the British. All Nationalities who own property in Spain and are not Domiciled in Spain or Tax Resident have the problem of Spanish Inheritance Tax for themselves and their Beneficiaries. This is a much higher figure than 300,000. I acknowledge there may be 300,000 British Residents in Spain not all submitting Tax Declarations (Returns) or paying Taxes in Spain. Some of these Tax Residents may qualify in certain Regions for exemptions under Regional Tax laws, but these exemptions may be subject to restrictions. For example the Deceased and the Inheritor may have to have lived in the Region for 5 years or the inheritor will have to continue to live in the same region for a period of 5 to 10 years after death. The Writer seems to have ignored non Residents who are the majority of British owners in excess of 700,000 and these owners will not qualify for any regional exemptions as their inheritance Tax will be payable to the Spanish Government and not the Region.

Wincham IHT claims that in terms of IHT the recipient of the UK company IS technically liable but subject to BPF (Business Property Relief). BPR would not be applicable in the majority of cases unless the Company was involved in another trading Enterprise in the UK. We have covered BPR in our FAQ's as it is a question we are asked on many occasions and we seek to provide the Client with the maximum available information.

Winchan claims that transferring ownership of a property from an Offshore company to a UK company will also completely remove Spanish IHT.Offshore Companies registered in places such as The Isle of Man, Gibraltar, Jersey etc, are not part of the EU and, therefore, do not benefit from EU Treaties. Consequently owning a Spanish property in an Offshore Company can be highly expensive as Spain can Tax these Companies annually, it currently Taxes the assets of Offshore companies at 3% a year. This means they are paying 3000 euros a year for every 100,000 euros of assets owned in Spain. Over a long period this amount of money would be significant. For example a 300,000 eu Spanish property has an annual Tax bill of 9000 eu to Spain a year. Surely this is crazy when a UK Limited Company does not have this Tax bill. A UK Company is not an Offshore company so is not subject to 3% annual Tax.

To summarize proposing only 1 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 and sometimes even incorporating UK companies, and only if a UK qualified accountant (ACCA or equivalent) are involved. Owning property in a UK Limited Company can completely remove Spanish Inheritance Tax and only costs about £700 a year to run which is significantly cheaper than anything Offshore. The UK Company solution can reduce the amount of Taxes in Spain and is very Beneficial in respect of foreign property ownership for UK Residents.

We would not recommend a mature client to take on borrowings secured on the property and there would be interest costs. There would also be Broker fees, mortgage registration charges and early termination charges to take in to consideration. It is unlikely that inheritors would wish to acquire a Spanish property and a mortgage (debt) liability, however if there is a mortgage on the property then this is fully Tax deductible in a UK Company.

The writer has stated that various methods can be employed to mitigate inheritance Tax and some of these involve Tax evasion or Tax fraud. We do not see how a Professional person could recommend to UK Citizens these methods. It is Tax evasion to fail to notify and pay the Tax to the Spanish Authorities within 6 months of the death of a property owner. Using the statute of limitations which in Spain is 4 years and 6 months to evade Tax is not a solution that a Professional should recommend to a British law abiding Citizen. This type of advice sounds to me if it comes from someone who would encourage black money transactions when buying and selling properties in Spain.

I wonder how many transactions the writer has been Professionally involved in where under Declarations of property values have been recommended to Clients and the clients now run the risk of Capital Gains Tax of those under Declarations. Please remember under Declaration is Tax evasion and for the avoidance of doubt Wincham has never been involved in an under declared property value transaction since its establishment in 1994. So all our clients can sleep easy at night without worrying whether the Tax man will knock at their door. You may also see from our Meet The Team page of our website that our Company consists of qualified Economists (Tax advisor's in Spain) and Chartered and Certified Accountants.

The verdict I gave to our test-case Benidorm distressed lady, who wants to leave the property to 4 inheritors and 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.

A Grandmother leaving a property (of 300, 000 euros) to her 4 Grandchildren leaves a 6164 euros Tax bill each (Tot 24,644) in Spain not 5,800 euros, plus individual probate and legal fees in Spain which could easily be more than 10,000 to, 15,000 euros including Notary, Registration fees and POA's. You then have 4 people owning this Spanish property and if 2 wish to sell their interest to the remaining 2 there would be a 7% Purchase Tax payable by the acquires and 3% retention by the sellers. In a UK Company it a simple transmission of shares at an agreed price with NO Taxes or legal costs in Spain. Transfer Tax in Spain when investing a property into a UK Limited Company is charged at 1% of the investment value so that is a maximum of 3000 euros. I have no idea where the 20,000 euros suggested comes from as there is no 7% Transfer Tax on this transaction.

Finaly to show the commitmnet to this transaction Wincham has invested in excess of £100,000 developing a bespoke online Case Management system for the benefit of all registered clients. This ensures all clients can track the progress of a Case by logging in to their personal, secure section of our website and viewing copies of all personal, company, bank and Legal documentation. Clients can also keep track of any Taxes or Fees due and view copies of receipted documentation once paid. Additionally we are now able to offer a Cash Book facility which records all expenses in respect of the ownership of the property. By ensuring that this simple facility is kept up to date clients can ensure that the cost of the preparation of the Annual Accounts for the company is kept to a minimum. An additional benefit of our system is that, should the company be inherited or sold in the future, there is a full record of all transactions available to the new owners.

I look forward to any comments or questions the readers may have.