“I want my money back”
Quick legal guide on How to protect your Spanish real estate property from the Spanish inheritance tax
CASE NO. 1: Andrew is a UK resident and has the British citizenship. He inherits a Spanish real estate property. The property is valued at 250,000 euros.
CASE NO. 2: Lucky John has also the British citizenship. He inherits a Spanish real estate property valued at 250,000 euros. The difference with regard to case no. 1 is that, firstly, Lucky John has had his regular tax residence in Spain for more than a year and, secondly, that the deceased has had his regular tax residence in Spain for more than 5 years.
How much does each of them have to pay to the Spanish tax authorities in terms of inheritance tax?
THE NATIONAL “SPANISH INHERITANCE” TAX
IN CASE OF NON RESIDENT PROPERTY OWNERS
If the heir and deceased are not regular residents in Spain complying with determined time periods, the heir has to pay inheritance tax according to the national Spanish inheritance tax law. This is the typical case of non Spanish property owners (case no. 1).
This national tax code determines certain amounts which are not going to be taxed for inheritance. These tax free amounts are relatively small in Spain and depend on which of the 4 tax classes are applicable to the heir. In addition to that, the Spanish national tax law has special rules for real estate properties used as home by the deceased.
E.g., according to tax class 2, the offspring and adopted children of 21 and more years as well as the spouse will not pay tax on an amount of 15,956,87 euro.
RESULT IN CASE NO. 1: The inheritance tax will be applied on 234,043.13 euros (=250,000 euros minus the tax free amount of 15,956.87 euros). The Spanish national inheritance tax of Andrew amounts to a hefty 38,875.01 euros.
THE “REGIONAL SPANISH INHERITANCE TAX”
IN CASE OF REGULAR SPAIN RESIDENTS
If the deceased and heir have been residing regularly in Spain complying with determined time periods, the heir has to pay inheritance tax according to the regional inheritance tax law (case no. 2). In practice, these regional tax laws are applicable only to a very small minority of non Spanish property owners.
The regional tax codes have made substantial tax reductions for the tax classes 1 and 2 (that is, parents, descendants, spouses) and imply in many cases tax free amounts of 99 and 99.9%. This implies in some cases the practical abolition of the inheritance tax. However, much depends on the concrete regional tax code which is to be applied.
RESULT IN CASE NO. 2: Let us suppose that lucky John (a regular Murcia tax resident) inherits the property in Murcia. In his case the inheritance tax amounts approximately to a meager 400 euros compared to the hefty aprox. 39,000 euros of not so lucky Andrew in case no. 1.
INFRINGEMENT OF EU LAW
The EU COMMISSION has initiated a non compliance procedure against Spain. The EU COMMISSION reasons that the discrimination of heirs who do not have their regular tax residence in Spain violates two of the pillars of the EU rights: the EU labour mobility and the free movement of capital.
If the Spanish Administrations do not treat resident and non resident heirs equally, this issue will probably be handed over to the EU Court which will definitely decide on the legality of the Spanish inheritance tax rules.
CONCLUSIONS
NON RESIDENT HEIRS WHO HAVE PAID HIGH SPANISH NATIONAL INHERITANCE TAXES IN THE PAST: wait and see what happens. Most probably, in future non resident and resident heirs will be treated equally. In that case non resident heirs who have paid too much inheritance tax in the past will probably have the chance to claim back the extra money they have paid.
NON RESIDENT HEIRS WHO ARE CURRENTLY IN THE PROCESS OF PAYING INHERITANCE TAXES: appeal against the administrative inheritance tax act and allege the illegality of the tax rules based on the infringement of EU law.
NON RESIDENT FUTURE HEIRS: as long as the illegality of this discrimination of non resident heirs and resident heirs is not clarified definitely, I recommend to these future heirs that they should be proactive and protect their future inheritance.
E.g., the real estate property owners can mortgage their Spanish property and deposit the mortgage money in some financial product. If the mortgage value equals the value of the property, the real estate will be valued at 0 euros in terms of inheritance tax.
The profits of these financial products must be high enough to cover all the costs involved, e.g. the interests of the mortgage, additional costs of constituting and canceling the mortgage, the taxes on the profits from these financial products.
Of course, this and other alternatives to reduce the inheritance tax burden can be risky. That is why such and other strategies should be elaborated in close cooperation with your consultants.
D. Andrés Díez Bronzini
Abogado & Rechtsanwalt
