Taxing times for Spanish inheritance
"In this world nothing can be said to be certain, except death and taxes." So said American founding father Benjamin Franklin but, in the case of Spain, such a view could be seen as a little simplistic.
Yes, everyone dies at some point and then inheritance tax will be due, but how much and where it will need to be paid is far from simple. Until recently confusion reigned, particularly when it came to EU citizens, non-tax resident in Spain inheriting from someone who was.
It has taken the intervention of the European Court (ECJ) to bring a little clarity to a situation that was seen as obviously unfair to non-residents (although apparently not by Spanish lawmakers, who either worked on a logic all of their own, or just didn’t care).
Non resident EU citizens inheriting property, cash or other assets from someone tax resident in Spain often found they were paying more inheritance tax than fellow beneficiaries who were tax resident in the country. The reason? Well now it starts to get complicated...
To put it simply—or as simply as we can make it anyway—Spain has national inheritance taxes and rates. BUT—we hope you are following this—the power of collection is in the hands of the Autonomous Regions, for example Andalucía, Valencia or Madrid. Those regions in turn are free to set their own rates, which are often lower than the national rates.
What’s wrong with that we hear you say. After all, if it means you are paying less, then that must be good news mustn’t it?
Well, yes. Unfortunately the way the laws were applied made it far from a simple matter, leading to a dual system. This meant any beneficiaries tax resident outside Spain, even EU citizens, could not benefit from the regional reductions and so were, by default, charged at the rates set by the national government. And that could make a substantial difference, worth in many cases thousands of euros. Oh, do keep up...
Thankfully the ECJ ruling (C-127/12 of 3 September 2014, if you really want to look it up) decided this was manifestly unfair and illegal, and ordered Spanish lawmakers to revisit the legislation. Not only can EU citizens now benefit from those regulations but also claim back any ‘overpayments’ (subject to a time cut off).
While the situation is much improved, the basic problem of regional variations continues to muddy the waters. In effect, it may well pay to move to another region within Spain to benefit from inheritance tax breaks.
Somewhat ironically, considering the criticism Gibraltar gets from within Spain as a ‘tax haven’ and centre for legal tax avoidance, the fabulously wealthy Duchess of Alba, with all her family connections to, and love for, her beloved Andalucía officially lived in Madrid. Smart move. It seems to have saved her beneficiaries €90 million in inheritance tax
A practical consequence of this fracturing of national tax regulations into regional ones is the frequent confusion over which region’s jurisdiction you fall under. Is it the region (or country) in which you reside that determines this, or the region (or country) where you own property?
To make matters worse, where there is no property but a substantial amount of cash in a bank account, which region’s tax regime should be used if the deceased was not tax resident in Spain? It would seem the address of the registered office of the bank will be used for tax purposes, rather than the branch where the account is held. But—you will not be surprised to hear—no one is quite sure, as the taxman has so far failed to tell anyone.
If you are confused, don’t worry, you are not alone. When Albert Einstein said: “The hardest thing in the world to understand is income tax!” he may just as well have been talking about Spanish inheritance tax laws!
We are here to help. The tax law experts at Spence Clarke are able to advise on each individual case, so if you are concerned about inheritance laws that may apply to you in Spain, please do not hesitate to contact us.
Miguel Angel Blanca Prieto, Tax Specialist