Ways on How to Avoid Inheritance Tax on Spanish Property

[Pali]

Hi, have just found out that my uncle passed away and has left us a property in Madrid. (there are four nieces and nephews and all live in Australia). I need to know the process involved in acquiring the property and if we do not wish to sell how can we reduce the inheritance tax.
Thanks

[Lawbird Lawyer]

Dear Sir or Madam,

Strategies to mitigate exposure to Spain's overrated IHT are carried our generally prior to buying the property or else placing a mortgage against it once purchased as explained in my article below. Incidentally, the Spanish Tax Office does not always accept the latter as it -often correctly- deems that placing charges on the property has been done with the sole purpose of tax avoidance.

You cannot really do much to reduce your IHT bill after the testator has passed away. As you are all residents outside Spain you cannot take advantage of regional tax allowances either. You would only be entitled to the national tax allowance dependant on which of the four groups the beneficiaries are classified in:

Spanish Inheritance Tax: How much is it? - 1st February 2000

I take the opportunity to offer you our legal services should you be interested (please click on the blue link):

Estate Transfer to Heirs

This service is intended for those who are inheriting the Spanish assets of a deceased person, whether as the legal heir to an estate or by means of a Will.

As from the 1st January 2010 our legal fees for this service have been lowered to 3,000€ plus 16% VAT. Payment in installments is available upon request subject to an initial downpayment.

The estate transfer to heirs service includes:

• Requesting of copies of the Death Certificate, in the event that the death took place in Spain.

• Requesting of a Will Certificate information and location from the Central Registry of Wills in Madrid.

• Obtaining of the Will from the Notary Public where it was signed / Estate Heirs Statement (in those cases where there is no will)

• Drafting and signing of the Deed of Inheritance Acceptance

• Partition of the inheritance according to what the will states, or, where there is now will, to the desires of the inheritors.

• Inscription at the Land Registry of the new owners of the Estate inherited.

• Cadastral modification of new owner

• Arrangement, calculating and payment of the applicable Spanish Inheritance Tax.

• Arrangement, calculating and payment of the applicable PlusvalÃ*a Tax.

Yours faithfully,
Raymundo LarraÃ*n Nesbitt

[Pat]

Thank-you for the article, it made interesting reading. Could you clarify for me whether the value of property is related to market value or escritura....if market value, who decides this? Thank-you.

[Lawbird Lawyer]

Dear Sir or Madam,

Do you mean the value of the real estate the Tax office takes on calculating IHT?

It will be the highest of any of the following three:

1. Cadastral value
2. Declared value/value on Title deed
3. Assessed value by the Tax office

Yours sincerely,
Raymundo LarraÃ*n Nesbitt

[Pat]

Dear Sir or Madam,

Do you mean the value of the real estate the Tax office takes on calculating IHT?

It will be the highest of any of the following three:

1. Cadastral value
2. Declared value/value on Title deed
3. Assessed value by the Tax office

Yours sincerely,
Raymundo LarraÃ*n Nesbitt

Thank you..that has made it clear.
best wishes
Pat

[Lawbird Lawyer]

You are welcome Pat.

Regards,

[John Curtis]

What would the Tax position be if I transferred ownership of my apartment to my two children ? I am living in Mijas Costa.

[Lawbird Lawyer]

Dear Mr Curtis,

That would fall under Spain's Gift tax which follows the same sliding scale as IHT tax but with none of its tax allowances. This option may prove very expensive and normally is not optimal from a tax mitigation point of view. Nevertheless we included it in the article that starts of this thread as another option to consider.

Whilst its true that on doing the above they will waive paying IHT on you passing away there may be drawabacks besides how onerous this option is.

One of the associated risks of transferring ownership whilst alive over to children is that they may divorce in the future. Their ex-partners may have a claim on the property and can actually sell it off against the will of other joint owners.

An alternative to the above would be selling them the property outright will attracts 7% Transfer tax plus all associated conveyance expenses (Land Registry, Notary and Lawyer's fees). The vendor would be liable for CGT and PlusvalÃ*a tax.

If your benefiairies are resident in the region of AndalucÃ*a they may be regarded as tax exempt for IHT purposes.

You can read further on this in my article.-

Spanish Inheritance Tax: Advantages of Making a Will in Spain - 3rd September 2009

Quoting an excerpt:

Inheritance Tax in AndalucÃ*a in which beneficiaries, resulting from a death occurred after the 7th of June 2008, may benefit from the following regional tax allowances:

•Reduction of 99.99% in the IHT taxable base on inheriting the family home (deaths occurred since the 1st January 2003). This requires the beneficiaries being resident in Spain.

•Reduction of 99% in the IHT taxable base on those inheriting a business providing certain conditions are met.

•No IHT paid on the Estate itself on compliance with certain requirements (i.e. inheritance taxable base < €175,000, heirs are next of kin or spouse, heirs pre-existing wealth < €402,678.11).

•No IHT paid by physically handicapped (disability above 33%) with a taxable base < €250,000

Yours faithfully,
Raymundo LarraÃ*n Nesbitt

[Celia]

I have been resident in Spain (Andalucia) for 6 years, my daughter is also a resident but she is currently working in the UK. I have made a Spanish will leaving her my property. I would like to know if I should set up a UK company to avoid IHT or not. The 1% charge could add up each year and if the IHT for my daughter is not too high would it be more advisable not to set up the company, I'm a little confused.

[Lawbird Lawyer]

Dear Madam,

The information you post is so scant that it is simply not possible to give you an informed opinion.

Regarding the option of setting up a UK Limited Company to avoid Spanish Inheritance tax I recommend you read carefully the following articles before committing yourself to follow this option:


1. Inheritance Tax: A Cynical Approach -13th January 2010

2. Costa Action Group: "Wincham Investments Limited"

Quoting CDSAG's article:

"The Wincham Inheritance Tax Protection Strategy
by Wincham Investments Limited

What is the Wincham Scheme?

The Wincham Inheritance Tax Protection Strategy is a scheme offered by Wincham Investments Limited, a UK company, designed to ‘remove’ or ‘sidestep’ Spanish succession tax on the death of UK resident owners of Spanish property. If only life was so easy: they only tell you half the story.

How does it purport to work?

Under their scheme, you place the Spanish property into a UK limited company.

Wincham claim that simply acquiring or transferring an existing Spanish property into a UK company will automatically circumvent Spanish succession tax for UK residents. This half of the story is true.

Why doesn’t it work?

Firstly, it takes no account of UK inheritance tax. This will be payable on the shares as UK limited company shares are always subject to UK inheritance tax. Arguments that business property relief will apply to exempt the shares from this tax are muddle headed: this relief only applies to real trading companies, not a single property investment company.

Example:

An elderly widowed individual with a total worldwide estate of around £1 million, including a Spanish property worth around €300,000, and two children, who will inherit equally on their death, the Spanish succession tax on the property would be around €36,000 in total (about €18,500 per child), with a top rate of tax in Spain of 18.7%. However, the UK inheritance tax on the same property would be around £104,350 (assuming an exchange rate of £1 to €1.15). This is clearly a much higher tax bill.

Therefore, even if you manage to avoid Spanish succession tax on an inheritance, you may not avoid UK inheritance tax, and if this is higher than the Spanish tax would have been, you have gained nothing, but spent money on the scheme.


Secondly, the scheme fails to emphasise the potential problems of capital gains tax when transferring an existing property in. If you have an existing Spanish property that you want to put into a company, you will be making a disposal of that property for capital gains tax purposes in both Spain and the UK (for a UK tax resident). If the value of the property has increased, you’ll be liable to tax even though you have only transferred it into a company. If there’s no gain in euro terms, there might still be a taxable gain in UK sterling terms payable to the UK tax man for UK residents. Even worse – you haven’t actually sold the property, so will have to find the money for the tax bill out of your own pocket.

Thirdly, when you eventually sell the property (it’s highly unlikely that you’ll find a buyer for the shares: most buyers want the property only) the company will be liable to Spanish and UK corporation taxes, and then the gain (after paying tax) is liable to further tax as a dividend if you extract the money from the company! You’ll end up paying far more than if you had left it in your own name.


Fourthly, putting the property into an existing limited company has all sorts of other problems including generating benefit in kind tax charges in the UK and losing business property relief for an otherwise trading company. You might also end up increasing the rate at which the company’s profits are taxed.


Fifthly, Whilst there have been claims that transfer tax (7% on property) could be avoided by using a company to own the property (because when sold it is the shares that change hands, not the real estate itself), there are anti-avoidance provisions in Spanish law to prevent this, and so this anticipated saving may not arise either.

Sixthly, many people wish to buy a property now for an ultimate retirement to Spain. This scheme could cost those people capital gains tax exemptions on that property if they ever move into it to live there.


Finally, Wincham claim that any rental income generated by the property is taxed solely in the UK. This is not correct – the Double Tax Treaty between the two countries which governs what is taxed where (not EU directives, as Wincham claim) state clearly that even in the hands of a company, rental income is primarily taxed in the country where the property is located, and also in the country of residence of the owner. Whilst the Spanish tax can be offset against the UK tax so that you are not taxed twice, this still means that the higher liability is due wherever it arises, plus you will have two sets of annual accounting costs.


Conclusion

Don’t put your Spanish property into a limited company. You generate costs and tax liabilities for no real gain. In any case, when you work out the numbers, the amount of tax being saved isn’t nearly as much as you might believe."

Source: Costa Action Group



Yours faithfully,
Raymundo LarraÃ*n Nesbitt