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Five things Britons need to know about inheritance tax in Spain

Spain’s inheritance tax laws are complex and differ considerably from the UK’s and other countries’ legislation. Jeremy Scudamore, who runs an Anglo-Spanish law firm in Madrid, explains what Britons in Spain should be aware of when dealing with inheritance tax.

Five things Britons need to know about inheritance tax in Spain
Spanish inheritance tax is divided into two parallel regimes. Photo: José Jordan/AFP

1. Spain now allows non-residents to have access to regional inheritance tax discounts

Until recently, Spanish law and many online tax declaration forms/platforms were set up so that inheritance tax deductions could only be claimed by residents in Spain. 

This was contrary to EU law on the basis that it contravenes the principle of free movement of capital within the EU and unfairly discriminates against non-Spanish residents who are tax residents in other EU states. 

In early 2020, the European Court of Justice pronounced that even non-residents from third (non-EU) states must be treated equally for inheritance tax (IHT) purposes in the same way as Spanish tax residents.

In December 2020, Spain’s General Directorate of Taxes announced that non-residents can apply the regional inheritance tax regulations, including deductions, either based on the deceased’s habitual address in Spain or where they have most of their assets.

2. There is no double taxation treaty between Spain and the UK regarding inheritance tax

However, in practice each country unilaterally sets off tax paid in the other country.

As it is the estate that pays inheritance tax (IHT) in the UK and each individual beneficiary/heir who pays Spanish IHT, a beneficiary who is a tax resident in Spain must justify to the Spanish tax administration the amount of tax paid on his or her behalf in the UK. 

To the extent that a beneficiary is tax resident in Spain and will receive his inheritance in Spain, English inheritance tax planning advice in respect of the tax position of the beneficiaries resident in the UK may well be detrimental to the Spanish tax resident beneficiary’s tax position and could result in additional and avoidable charges to Spanish IHT tax (“impuesto de sucesiones y donaciones” in Spanish) being paid. 

It is important to take advice from a Spanish IHT tax expert to coordinate the tax position between the UK and Spain to minimise any Spanish IHT payable by the beneficiary who is a tax resident in Spain.

3. The obligation to pay Spanish inheritance tax runs from the date of death of the deceased

Even though the estate assets may not be distributed to the beneficiary resident in Spain until sometime later (typically in the case of the sale of real estate), the delay in receiving the assets/proceeds will not affect the obligation in Spain to declare and pay IHT.

4. In Spain, it is not the estate that pays IHT as in the UK, but each individual who is liable according to the value of their inheritance. 

Heirs, unlike legatees (a person who receives a legacy), will inherit assets and debts and, if they accept the inheritance, will be responsible for these.

Beneficiaries should therefore exercise caution if any property they might stand to inherit is in negative equity.

READ ALSO: Why Brits in Spain should consider drafting a will now more than ever

5. Spanish inheritance tax is divided into two parallel regimes: the state IHT tax regime for non-residents and the regional IHT regimes for residents of those regions.

The regions vary significantly from one to another concerning the IHT tax payable and the various deductions and benefits which are applied. 

Moreover, the laws governing these regimes have not on the whole been adapted to the European case law concerning infractions by Spanish IHT laws of European law, thus creating a patchwork of law and obligations which can be difficult to navigate.

IHT tax in Spain is the subject of self-assessment tax returns so it is the taxpayer who declares the tax to the tax administration. 

If a taxpayer is unaware of any tax benefits or deductions that may be available to him and fails to claim these in his tax declaration, he/she cannot later claim this benefit. 

Similarly, he/she may find himself in the situation of paying excess tax and having to claim back the excess tax paid, which may take a considerable amount of time and is not without risk. It is important therefore that the taxpayer receives expert advice from a competent IHT tax advisor when declaring Spanish IHT.

Jeremy Scudamore is the founding partner of Scudamore Law , an Anglo-Spanish law firm based in Madrid with offices in London which has been providing services to English-speaking foreign investors in Spain for over 2 decades.

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For members

WORKING IN SPAIN

Will you pay more under Spain’s new social security rates for self-employed?

Spain’s autónomos will soon pay monthly social security fees based on how much they earn, instead of a fixed rate, the Spanish government has confirmed. So will you end up paying more or less?

Will you pay more under Spain's new social security rates for self-employed?

Autónomos or the self-employed in Spain have it tough, having to pay one of the highest social security contributions in Europe, on top of income tax. However, this is all about to change. For some it will mean they will end up paying less in social security fees, but for others it will mean paying considerably more, making the situation even tougher.

Currently, autónomos have to pay a minimum contribution base of €294 per month after they have been registered as self-employed for two years, regardless of how much they earn.

For the first year, they will pay €60 a month, and during the second year it rises progressively to reach €294.

But this is all set to change because on July 20th, the government confirmed that after months of negotiations, they had come to a final agreement with self-employment groups ATA, UPTA and Uatae.

READ ALSO – CONFIRMED: Spain’s new tax rates for the self-employed from 2023 onwards

Instead of there being a fixed rate of €294, the fee will go down progressively to €200 a month for lower earners and progressively higher – up to €590 a month – for higher earners.

Spain’s Ministry of Employment and Social Security will also change the rates for each group of earners every year. So far they have revealed what these rates will be for the years 2023, 2024 and 2025. 

Find out below if this means that you will be paying more or less in social security fees from next year.

Essentially this shows that anyone earning under €1,300 per month will be paying less in social security fees, with those earning €1166.70 to €1,300 a month paying just €3 less than they do now.

Those earning between €1,300 and €1,700 will pay the same amount as they do now – €294 per month, while anyone earning over €1,700 will be paying more.

According to the government, of the three million self-employed workers in Spain 2.4 million earn under €1,700 per month, meaning that the majority will see their social security contributions staying the same or reduced.

They say that these changes will benefit two out of every three self-employed people in Spain.

While this is of course good news, it’s the mid to high earners who will be affected by the changes the most.

High earners, those earning €4,000 per month will have to pay out €300 or more in social security fees, but it’s mid earners that will end up being the worst off.

For example, an autónomo who is just starting to be financially stable and earning €2,030 per month will end up paying €390 per month by 2025, which is €76 more than they currently pay.

It means that autónomos may not want to take on more work for fear that it will push them over the threshold and they’ll have to pay more in fees and it may also encourage more people to be paid under the table, referred to as ‘trabajo en negro‘ or ‘working in the black’ in Spain.

Self-employed in Spain already pay some of the highest contributions in Europe

Many self-employed people in Spain already believe the system is unfair because they pay a lot more in social security contributions than their European neighbours, and many are now set to pay even more.

In Germany for example, a self-employed worker with a monthly income of less than €1,700 pays nothing. Anyone earning over this amount pays a fee of €170.

In the UK, national insurance contributions start at £3.05 a week, or £158.60 a year. Those earning over £9,568 will pay 9 percent on profits up to £50,270 and 2 percent more on profits after that.

More benefits

While those in Spain do end up paying more, they also gain more too. Health care, sick pay, maternity and paternity benefits and pensions are all available to self-employed workers here.

This is not the case in many other European countries, who may have to pay extra for health insurance or do not get any maternity or paternity benefits if they’re self-employed.

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