Antonio Flores’ Blog

Back in February 2016, the Tax Office in Andalusia divulged interesting IHT data: only 7% of all inheritors in this region had had to pay tax following the demise of their loved ones, at a time when maximum allowance per beneficiary was of €175,000.

Of the 7% who had to pay IHT, only 2.1% were beneficiaries classed as next-of-kin of Group I (children -natural and adopted- and other descendants under 21) and Group II (children and other descendants aged 21 and over; parents and other ascendants, and spouses, with the remaining 5% being more distant relatives or beneficiaries with no family ties with the testators.

In 2017, the exemption was increased to €250,000, thus reducing even more the overall impact of this annoying tax.

In 2018, a further tax cut has increased the exemption by €1,000,000 -provided the beneficiary does not have savings or assets of up to the same amount-. This exemption, which applies to residents of Spain but also, any inheritors -foreign or not- who at the time of death of the testator were residents of the European Union or European Economic Area (EEA), means that pretty much nobody will pay IHT in this region, except of course if the inheritor happens to be a resident of the UK and Theresa May sets Britain on course for a hard Brexit (if she has not already done).

For if the UK do not negotiate a separate agreement with the EU to maintain the status quo currently enjoyed all EU/EEA residents, the negative impact in inheritance tax will become particularly visible for thousands of potential inheritors from the UK, for whom the maximum deductible amount will be -on average- €16,000 per inheritor, just as any non-EU citizen.

The negative effects will equally translate to income obtained in Spain, which will be taxed with 24% -as opposed to 19% now- and without the possibility to deduct costs and expenses, and CGT relief when reinvesting in a habitual domicile, which disappears.

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Lasting Powers of Attorney (LPA), well known and extensively used in common law jurisdictions, are legal documents which allow a person who is at least 21 years of age (‘donor’), to voluntarily appoint one or more persons (‘donee’) to make decisions and act on his behalf as his proxy decision maker if he should lose mental capacity one day.

In Spain, very few know that there are two almost identical legal documents that grant the same powers to a trusted person should the time of incapacitation arrive.

These documents are known as the “Poder Preventivo”, or Preventive Power of Attorney (PPA), and the “Autotutela”, or “Appointment of Tutor”, both of which are granted before a Notary Public.

The Preventive Power of Attorney is one where a person can deal with the financial affairs of the grantor, with immediate effect after a certain date or once a medical doctor declares a person incapacitated. For its part, the Appointment of Tutor deals with health and care decisions, daily routine or where the affected person should live (but will require judicial approval where the sale of assets is concerned).

It is recommendable to grant at the same time both the Preventive Power of Attorney and the Appointment of Tutor to avoid the lengthy (and costlier) process of applying for a judicial decision -appointment of tutor- following a clinically diagnosed incapacitation or intellectual disability because of disease or accident, a process that furthermore will require a separate procedure to sell real estate or other assets.

It is worth noting that both appointments can be revoked by the grantor whilst capable, and that Notary Publics in Spain have an obligation to communicate any such documents to the Spanish Civil Registry.

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According to the Spanish right-wing party PP, 40,000 Andalusian families relocate to Madrid every year looking for a more favourable inheritance tax (IHT) treatment. The socialist-run Revenue and Public Administration Council has disputed this and state that records show that in 2015, there are no more than 81 Andalusian families that have moved ‘abroad’ within Spain, and only 17 have done so to Madrid.

If we consider that the above data is offered by bitterly opposed political parties, the truth –first victim of the debate- must lie somewhere in between the quoted figures. But there is no denying that IHT in Andalucia, compared to other regions in Spain i.e. Madrid, is seriously onerous.

As an example, a 40-year old person registered in Andalusia (or any EU-EEA resident inheriting in this region) that receives by way of inheritance 200k Euro, will pay 28,250 Euro to the Tax Office, whereas a Madrid-based inheritor will only have to part with 285 Euros.

In addition, the method to apply the 175k Euro allowance is wholly imperfect due to defective law drafting. The consequence of this is that a person receiving estate under the €175k allowance (by the way 97% of cases in 2015) from his/her parents will be exempt from IHT but if that same person receives a further say 25k (as in the first case), he/she will be slapped with a 28k Euro tax bill!

This “tax bracket creep” is one of the great challenges faced by Maria Jesus Montero -Revenue Counsellor of the Andalusian Government- for 2016. Conservatives, led by PP party, are all for eliminating IHT altogether between parents and children, irrespective of the size of the estate, on the remaining 3% tax returns.

Dealing with that relatively small 3% gap will avoid the proliferation of illegal tax evasion schemes -using foreign companies or equity release mortgages-, uncertain avoidance loopholes -nervously waiting 4 years and 6 months for statute of limitation to kick in- or outright rejection of inheritances, such as when the taxes to be paid are higher than the equity on those properties.

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With effect from the 17^th of August 2015, a new EU law will automatically apply –replacing local laws- to the succession of persons who die on or after the same date in countries parties to the agreement. While the main concepts of this new law may seem simple, the name given to it is truly mind-boggling:

Regulation  (EU) No 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession.

But let’s not get carried away by all the legalese and go straight to the most relevant points of the law; and by doing so perhaps we can kill the expat rumour mill before it causes havoc.

The main change introduced relates to the applicable law to succession: As of August 17th, citizens are able to choose whether the law applicable to their succession will be that of their habitual residence or that of their nationality, on the understanding the former law will apply by default if there is no choice. This has important implications in Spain where, owing to century-old laws, children have an automatic entitlement to two thirds of the estate.

This choice shall be made expressly in a declaration in the form of a disposition of property (will or codicil), or shall be demonstrated by the terms of such a disposition.

People who already have a will need to check if it contains a term or terms that indicates that the national law, sometimes described as personal law, will apply. Most wills I have come across do state this when noting that the testator’s wishes are in accordance to his or her national law, which in my opinion suffices.

Where there is no provision to the effect in a will and the testator wishes to avoid the application of Spanish succession laws, we recommend drafting a new will.

Finally, we still recommend property owners to have a Spanish will as well as one in the country(ies) where they own assets, at least until we can experience how easy -or not- will it be enforce wills in other EU states. This applies in particular to the United Kingdom and Ireland since neither country is bound or subject to the application of this Regulation.

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Until recently, Spanish lawyers cautioned their clients that the level of Inheritance Tax (`IHT´) in Spain, for non-resident heirs, could mean the difference between being able to inherit or not. The worry is still there but, ever since the European Court of Justice (ECJ 3/9/2014) ruled that Spain’s IHT tax rules were discriminatory – different rates for residents and non-residents-, the latter are able to enjoy the same allowances residents can apply on their tax returns.

So now, for instance, an EU-resident who inherits in Andalucía an estate worth less than €175.000 from parents, children or spouse is totally exempt from paying IHT. This is no small matter for this allowance has made possible that in 2014, according to the statistical information provided by Junta de Andalucia, 93% of all IHT tax declarations filed anywhere in Andalucía were without associated payment (nil tax returns).

If we take for instance the average family with a property and two children, on the basis that in Andalucia the average price per square meter of property -as recorded in December 2014- was of €1,500, with an average size according to the Ministry of Housing of just over 105 m2 (and 187 m2 for town houses and villas), it is easy to understand why only 7% of IHT tax declarations filed by residents of Andalucía included a sum of due tax.

This is great news, for more than one reason. Firstly, a logical one: it reduces the IHT tax bill on the estate of holiday property owners, automatically, as from the 28/11/2014 (date of effective implementation of the ECJ ruling). Secondly, it takes the fear of God away from thousands of owners who’ve been incessantly bombarded -over the last years- with unreal horror stories that depict the Spanish taxman slicing into the estate of a deceased Briton, only to offer an illegal tax-dodging scheme to avoid it (mostly foreign based companies and equity release loans).

Of course, IHT will still be an issue for the wealthier whose inheritors could be hit with as much as 34% (on estates above 800k Euros). For owners not included in the above 93% contingent, we suggest some degree of planning to minimize -legally that is- exposure to IHT.

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Newspaper ABC has exposed a worrying trend: since 2007 110% more of eligible heirs to Spanish inheritance have renounced to their portion of the estate because there is more debt than equity to inherit.

According to the Notarial Council General, it’s a shame that so many people take the route of renouncing the inheritance, without knowing whether indeed the liabilities exceed the assets, just because it is not possible to have a clearer picture of the financial situation of the deceased prior to going in front of a Notary.

But Spanish Notaries remind us that the Spanish Civil Code has a solution for this: to inherit subject to “benefit of inventory”. This allows the inheritor to have the right to obtain the exact situation with the estate of the deceased testator prior to becoming a full inheritor but at the same time, accepting the designation if finally, there are assets worth inheriting. In other words, debts that are inherited will be covered by assets from the estate, not the inheritor.

For example, beneficiaries of a will written by victims of banks implicated in the Equity Release fraud are advised to choose this route to avoid becoming personally responsible for the mortgage loan that was sold fraudulently as the miracle product against Spanish Inheritance Tax.

This method of inheriting also allows inheritors to litigate against creditors (banks for instance where miselling took place) without becoming personally liable for it.

Finally, if all inheritors renounce to the inheritance, the Spanish State will be eligible to receive it although, subject too to debts not being higher than the part of the estate that is really worth something!

Antonio Flores Inheritance, Litigation herencia beneficio inventario, spanish inheritance tax, Spanish Succession, Spanish Wills

As if the UE-legislative machinery had no more pressing legislation to pass, a recently enacted Regulation (EU) No 650/2012 has been earmarked to come into force soon, as soon as the 17th August…2015.

The piece is not particularly layman-friendly read and it is advisable that you have a good night’s sleep before embarking on the mission of fully understanding what it really encapsulates, bearing in mind too that its entry into force is yet some time away.  Or alternatively try to understand this passage: “…this Regulation should provide for the adaptation of an unknown right in rem to the closest equivalent right in rem under the law of that other Member State.

As tax planning expert Richard Frimston says, Regulation (EU) No 650/2012 includes nine and a half initial pages of 83 separate recitals. Some of the recitals are somewhat Proustian and do not always add to clarity. They might, however, prevent tossing and turning in bed before falling asleep.

Point 9 seems the easiest of the text, indicating that “…the scope of this Regulation should include all civil-law aspects of succession to the estate of a deceased person, namely all forms of transfer of assets, rights and obligations by reason of death, whether by way of a voluntary transfer under a disposition of property upon death or a transfer through intestate succession.”  It also marginally deals with gifts inasmuch as they may ultimately affect the shares of the beneficiaries.

It also conveys clearly that taxes will be left out of it by indicating that “...This Regulation should not apply to revenue matters or to administrative matters of a public-law nature. It should therefore be for national law to determine, for instance, how taxes and other liabilities of a public-law nature are calculated and paid, whether these be taxes payable by the deceased at the time of death or any type of succession-related tax to be paid by the estate or the beneficiaries.

In a nutshell if at all possible, and provided my understanding of this legislative labyrinth is correct, the Regulation stipulates the following:

Applicable laws:

1. In principle, the law of the EU country of the deceased’s habitual residency at the time of death will rule on the succession.
2. If however the deceased was manifestly more closely connected to a country different than the one above, in the light of the circumstances of the case, then those laws would apply.
3. A person can choose to as the law to decide on the inheritance that of his nationality be it either when making the choice or at the time of death. This has to be done in a will.

Applicable jurisdiction:

1. In principle, inheritance matters will come under the jurisdiction of the EU country of the deceased’s habitual residency at the time of death.
2. Where the deceased chose a different Member state law to that of residency, the parties concerned (designated inheritors) may agree that the court of the Member state of the choice of law are to have exclusive residency.
3. At the request of one of the parties to the proceedings, the court may decline jurisdiction if it considers that the courts of the Member state of the chosen law by the deceased are better placed to rule on the succession, taking into the practical circumstances of the succession, such as where the assets are based or the habitual residency of the parties.

As an example, 3 inheritors of a British person resident in Alicante that chose, as applicable laws, those of England and Wales, will ventilate any succession matters through the Courts of Alicante. They can also submit the matter to UK Courts if the 3 agree or in case of discrepancy, any of them can request that UK Courts deal with the case if they are all residents there or the assets are all based in say Manchester.

The regulation makes further provisions in relation to other aspects of the succession but, as far as this post is concerned, I feel I have now beaten insomnia!

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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 widow 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 all children equally where the testator was

1. British and
2. had no assets in the U.K., 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 widow opposed to sharing, her lawyer saw it convenient to settle with the above figures in mind, by means of a cash payoff.

Their proposal, not negligible given the size of the estate, was argued against on the basis of what 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 as a Spanish resident and holding only Spanish property, he would have wanted his estate to be bequeathed in equal 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?

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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.

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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.

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