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.
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.
READ ALSO:
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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.
READ ALSO:
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