What you need to know about

Inheritance In Spain
How to Reduce Inheritance Tax
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Legal Note - It should be remembered that the application of Spanish law varies considerably according to region and the circumstances of each individual and so this report can be treated as a general guide only and not as a substitute for qualified legal advice regarding any particular situation. Responsibility for acting on foot of this guide alone is entirely personal and no liability can be accepted by myAdvocate Spain. To get advice on your specific situation from expert legal practitioners in Spain please see the end of the guide.

How to reduce Inheritance Taxes in Spain

Inheritance taxes in Spain can swallow-up a potentially huge percentage of any inheritance and so it is worth planning ahead as carefully as possible to avoid the lions share of any legacy winding up in the Spanish government's coffers. Of course it may be that the stage has already been reached where investments and purchases have already been made and there remains little to be planned for. In any case we will look at all of the options open to an individual who wishes to minimise the inheritance tax they must pay in Spain. Ever since the Spanish government devolved responsibility for inheritance taxes to the regional governments, huge steps have been taken to reducing and in many cases eradicating the payment of inheritance taxes. However, the exemptions granted apply only to those who are resident in the region often requiring residency for a majority of a period of five years. If residency in any specific region is not established then the 'State' rules apply.

Deductions at State Level

Even if unable to take advantage of the more generous deductions available at a regional level there do exist certain exemptions based on the governing legislation at state level. In addition to the personal exemptions up to a maximum of 47,858.59 for close family members there are also exemptions for inheritance of the habitual family residence.

Inheriting the 'Family Home'

This will specifically benefit those who have moved to Spain to live permanently and can therefore call their Spanish property their permanent residence or 'vivienda habitual' as per Article 20(c) Law 29/1987. The concept 'vivienda habitual' is as defined by the Law relating to income tax in Spain (Ley de Impuesto sobre la Renta de las Personas Fisicas). Following this, anyone who spends more than 183 1

days a year in Spain is technically resident for tax purposes. It is also very important to obtain a certificate of 'Empadronamiento' which means to register as being a local resident with the town hall. It is a simple process and may be used as evidence of being a resident and using the home as your 'vivienda habitual'. The amount of time that needs to have been spent by the deceased living in the property before it may be called a 'vivienda habitual' is described in the income tax laws as three years though it also states that death of the individual during that period is an exception so it can only be said for sure that the longer the period of time the better. If you are resident in Spain for tax purposes (more than 183 days a year) then you are legally obliged to make tax return once a year (even if it be a zero return). Known as the 'Declaracin de la renta', this also helps to prove residence and if the address used on the tax return is that of the property in question it goes towards evidence that it is your 'vivienda habitual'. *** Care should be taken here as if you are determined to be resident in Spain for tax purposes then in theory your worldwide wealth is taxable in Spain. The exemption amounts to 122,606.47 per beneficiary and is restricted to spouses, children, parents of the deceased and only to extended family members who have lived with the deceased for a minimum of two years prior to the date of death. This exemption has a ceiling of 95% of the value of the property. One proviso is that the beneficiaries may not immediately sell the property and must maintain ownership for several years.

Debts, Loans & Charges

In order to reach the 'net' estate that is to be divided among beneficiaries, it is necessary to first deduct from the estate any existing debts or loans belonging to the deceased. There are limits however and typically a 'loan' or debt to any beneficiary is not deductible. The only exception to this is where the deceased owed monies to the Spanish Social Security system and in this case any person, including a beneficiary, who pays off such debts may be able to deduct them from the estate before it is distributed to other beneficiaries. In order for a debt to be deducted from the estate of the deceased it should be ratified by a public document i.e. an informal debt will not constitute a deductible debt for the purposes of Article 13. As a result it is possible to reduce the value of a property by any mortgage that exists. This can radically reduce the value of any inheritance tax payable.

Article 12 'charges' on properties may also be deducted but these are unlikely to be present in most typical scenarios.

Other Expenses
All personal expenses incurred with relation to to the final illness and funeral of the deceased may be deducted from the estate before considering inheritance taxes. Where the body of the deceased is returned to another country for burial these can be substantial. In any case, all funeral and health care receipts must be retained. The expenses relating to the management of the inheritance such as legal and notary fees are not generally deductible unless they relate to litigation on behalf of the beneficiaries as a group.

Regional Deductions
As previously stated, regional governments have greatly reduced or eradicated inheritance taxes for close family members up to varying maximum amounts. The extent of the exemptions are determined by the region in which you are resident. This can be a disputed matter and legislation exists to determine which region's laws are to be applied where there is a conflict. In many cases, the location of a property determines the regional law to be applied where it is the subject of an inheritance. Examples of the exemptions and reductions available at a regional level can be seen in the report 'Inheritance Tax in Spain'.

Other Considerations
Care should be taken where a couple are unmarried. This could mean that the surviving partner may fail to benefit from tax advantages ordinarily available only to spouses. This can be rectified in a number of regions by registering as a 'pareja de hecho' in the relevant local registry and which henceforth permits the partner to benefit from typical spousal tax advantages. They will of course be subject to all of the standard legal exclusions that a spouse would typically face such as residency etc.

Estate Planning
The term relates to organising an estate in such a way that it's distribution can be carried out in the most financially advantageous manner possible. Of course it depends upon a number of factors: The make-up of the estate is it made up of property, businesses, chattels or most likely a mixture of all three The way the estate is to be distributed To whom the owner wishes to distribute the assets.

It is impossible of course to cover the whole array of possibilities that exist and so this can only be managed on an individual basis with an expert in the field. It is however worthwhile making general suggestions regarding methods that can be used to minimise taxation liability. Life Interest or 'Usufruct' Rather than leaving their half of a property to the surviving spouse or registered civil partner, an individual may bequest a life interest only. It is taxed at 70% of the value less 1% per year that the beneficiary is over the age of 20 e.g. if the surviving spouse or civil partner is 60 years old the life interest is valued at 70 (60 - 20 = 40) = 30% of the half of the property owned by the deceased which is a 70% reduction in the taxable base. In fact, where there are children, then it may be interesting to convert from outright ownership to life interest only. In this way ownership would be in the names of the children from the outset and any inheritance tax would be negligible as upon death the life interest would be extinguished. The owners (in this case the children) would be prohibited from dealing with the property without the express consent of the life interest holders. Buying Property with a mortgage By purchasing with a mortgage (the maximum is normally 70% in Spain) then a deduction may be made of any outstanding mortgage before inheritance tax is considered. While more difficult to obtain later in life this is something that may be done at any time to reduce the inheritance tax as it reduces the absolute value of the assets being inherited. Setting-up a Company This is a method that found favour at one time but isn't really to be recommended. The tax benefits are disputable as the company could be considered to be a vehicle for evasion of taxes. Also, there are 4

yearly running costs that over the years would mount up and when considered against any purported tax savings would probably be negligible. Furthermore, when seeking to sell the property problems might well arise as you would in fact be selling shares in a company that will carry the same administrative headache for the new owners and would not be very appealing. Download all of the reports in this series to get all of the information you need to protect your wealth when dealing with an inheritance in Spain. Just some of the topics dealt with: The immediate steps to take when dealing with an inheritance. How to manage an inheritance in Spain with a non-Spanish will. What to do if there is no valid will. The difference between State and regional tax exemptions. Click here to download your free updates: Protecting Your Wealth from Spanish Inheritance Tax

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