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If I already own property and I then incorporate a spanish SL company what transfer tax do I pay on transferring the property into the company?
I have made some enquiries and I have been told by some 7% and others 1%?
Also is this still a recommended way of IHT planning.
I don't suppose it's straight forward but any advice or help from forum members greatly appreciated.
Dear Sir/Madam,
Please read our article on Ways on How to avoid Inheritance Tax on Spanish Properties written on the 22nd of June 2005.
I quote an excerpt.-
Option 4: Buying or owning through a Spanish Limited Company
This is becoming a very attractive form of minimising the effects of IHT if certain steps are taken. By virtue of article 108 of the LMV (Ley de Mercados de Valores) Act, company shares can be transferred with no transfer tax associated to it provided that none of the acquirers take control of the company (no more than 50% of the shares) and that one year has passed from the act of incorporation of the company or the transfer of the property to the company if this happens after the act of incorporation.
Many property owners are availing of this structure to avoid IHT by effecting the sale of the shares to their inheritors before death. Such a sale is not susceptible of being taxed as a gift. If more anonymity is required, the sale of the shares can take place via a UK Notary Public, and further legalised with the Hague Apostille.
Disadvantages: Company running costs of aproximately 2,400 € yearly.
Costs: Incorporation of company: 1,500 Euros.
If the property is already owned by the person wishing to mitigate IHT, Transfer tax at 1% of the share of the value of the property transferred to the company is applicable.
Savings on IHT: 100%
I read your article on avoiding inheritance tax and it seems like transferring to our children´s name would be the best way to do this, but I´m worried about the tax authorities taxing the gift.
Is it still possible to avoid Spanish inheritance tax by transferring the property to a company? I seem to remember that someone said the tax laws have changed and it would not be so anymore.
If we "sell" the property to our children will we have to use a minimum price. I found a "taxman's calculator" on your page, would that be the correct minimum price then?
What happens when our children don´t actually pay that price, can we just state in the notary that the amount has been paid in our home country or will the notary require a proof of transfer of those funds somehow?
A big thank you for this very informative web page!
I would just like to add that foreigners, particularly British and Irish, have overblown the myth of Spanish Inheritance tax.
There are some particular websites run by their fellow countrymen that feed and build on this fear to sell their services actually advertising that IHT reaches 80% in Spain.
This seldomly happens as its for exceptional and extreme cases only which they place as normal examples of Spanish taxation. The vast majority of non-residents buy jointly (typically husband & wife) a property with an average price of 250,000€. Their appointed beneficiaries (normally their children) will have plenty of tax allowances to the point that IHT will be almost negligible as they will normally inherit only 50% split between them.
There's a whole industry hinging on this tax. For properties worth above 600,000€ it is highly recommendable to seek professional tax planning advice from a Spanish lawyer prior to purchase them. It is only for properties with a minimum substantial value that tax mitigation comes into play as the setting up and running expenses are offset on the long run.
We have many people seeking complex off-shore company structures (with very high annual running costs and of which they are not fully in control) for properties that are worth 250,000-400,000€. In these cases it is hardly worthwhile to pursue such structures. Properties ranging between 400,000 - 600,000€ are borderline and would be recommendable to engage professional advice on whether its worthwhile or not to buy them thorugh corporate structures or other tax mitigation options.
Further to the queries you raise:
1. I read your article on avoiding inheritance tax and it seems like transferring to our children´s name would be the best way to do this, but I´m worried about the tax authorities taxing the gift.
Transfering the ownership to your children's name would not be regarded as a gift because on buying the property you can either:
i) put down jointly under their names
ii) or else (more expensive option) once you've purchased it, they can buy the outgoing share outright. Which involves paying 7% Transfer tax, Land registry and Notary fees and lawyer's fees.
Is it still possible to avoid Spanish inheritance tax by transferring the property to a company? I seem to remember that someone said the tax laws have changed and it would not be so anymore.
Yes it is. As explained above, for properties above 600,000€ it is highly recommendable. For properties worth between 400,00 - 600,000€ it takes a case-by-case approach as its not always recommendable because of the company running costs and associated risks.
Regarding the change in tax law, it's correct. Three years ago it was tax efficient to hold property by means of a Spanish S.L. as on selling its shares you paid less taxes than if you actually held the property itself under your own physical name. However, a tax change brought about in 2007 lowered the CGT liability from 35% to 18% for non-residents. As from that moment onwards the taxation became higher to sell company shares (whose main or only asset was Spanish real estate). That is why the Spanish Tax Office allowed for these holding companies, whose only asset and activity was just to act as holding companies of Spanish Real estate, to voluntarily wind up free of charge (January till June 2008).
But then you can always place another off-shore company above the Spanish S.L. to waive this...Again I repeat this takes professional planning advice from a specialised Spanish lawyer.
2. If we "sell" the property to our children will we have to use a minimum price. I found a "taxman's calculator" on your page, would that be the correct minimum price then?
Of course, otherwise 6 to 8 months after completion you will receive a notification from your Tax office requesting additional taxes as they will think you underdeclared. More on this topic in this blog of ours. the Spanish Tax Office doesn't understand well the concept of snatching a bargain or distressed asset and they will make you pay.
3. What happens when our children don´t actually pay that price, can we just state in the notary that the amount has been paid in our home country or will the notary require a proof of transfer of those funds somehow?
Not neccesarily. But you will still have to pay the associated taxes: 7% Transfer tax, Notary and Land Registry fees, Solicitor's fees. The problem with this is that the Tax Office may actually think you gifted the proeprty and will make you pay the difference for Gift tax which follows the same sliding scale as Spanish IHT and with none of its tax allowances.
A big thank you for this very informative web page!
Thank you! We appreciate your comments.
Just have to thank you once again for taking your time to give such a complete answer to all our questions!
You're welcome Sir/Madam!
Yours faithfully,