Stalwart wealth management

Your estate may not be subject to inheritance tax (often referred to as succession tax in Spain). Much depends on whether you live in Spain, and if so where.

If you’re not habitually resident in Spain the state succession tax rules will apply to your estate. However, if you’re a resident in Spain and have been for at least 5 years your estate will be treated according to the rules set by the autonomous community where you live.

Non Resident Property Owners

If you don’t live in Spain, but you own a holiday home here, the beneficiaries of your estate (note that the liability rests with the inheritor rather than the estate) when you die will be liable for succession tax on your Spanish situated property - when I say beneficiaries this includes the spouse of the deceased. Under the state rules each non resident beneficiary is entitled to an allowance of approximately €16,000 above which tax is payable at the scale rates (7.65% – 34% depending on the value of the estate).

E.g. Let’s say you own a Spanish situated property with an escritura value of €150,000 and this is your only Spanish asset. You die, and in your will you leave the property to your spouse. Your spouse has a tax-free allowance of €16,000, so the taxable estate is €150,000 – €16,000 = €134,000 and the associated succession tax liability will be €18,000.

Resident Property Owners

As for non residents, the liability to succession tax rests with the inheritor rather than the estate, and the inheritor is liable for Spanish succession tax on any assets they inherit regardless of whether the assets inherited are situated in Spain or not. However, if you inherit assets located outside Spain you can usually claim an allowance for any foreign inheritance taxes paid.

There are quite a few reliefs and allowances, and they vary between each autonomous community, but I’ll try to give you a flavour of what’s available below: -

The following allowances apply for spouses and children: -

Andalucia – 100% of the inheritance providing the amount inherited is less than €125,000 and the beneficiary has personal wealth of less than €402,678. Otherwise circa €16,000 per beneficiary.

Cataluna – €18,000 per beneficiary.

Islas Baleares (IB) - 99% of the tax due for habitual residents in IB (defined as resident for at least 1 year before the death); €25,000 for each non resident beneficiary.

Islas Canarias - 99.9% of the tax due for habitual residents; €18,500 for each non resident beneficiary.

Murcia – 99% of the tax due for habitual residents; circa €16,000 for each non resident beneficiary.

Comunidad Valenciana - 99% of the tax due for habitual residents; €40,000 for each non resident beneficiary.  

So in certain communities there’s no tax to pay providing you’re a resident (read as paying resident’s taxes). The length of time that you need to be resident before you qualify for the higher levels of relief available in certain communities varies from one to five years. If you live in a community where the five year rule applies I’d recommend a short term life policy to pay the potential tax liability – contact us for an assessment of the potential liability to succession tax on your estate.

On 18th April 2008 Spain’s Council of Ministers approved a measure to abolish wealth tax from 1st January 2008. However, if you’re Spanish resident and your assets are worth more than your allowances (up to €150,253.03 for the main home plus up to €108,182.18 for all other Worldwide assets) you may still be required to file a wealth tax return.

If this is the case you will be given a 100% credit for your assessed wealth tax liability, which means that, as the rules stand at the moment, you will pay no wealth tax. It’s worth noting that wealth tax hasn’t been completely abolished since the tax credit of 100% could be reduced in the future.

For non residents, the annual tax payment made until 2008 in respect of your Spanish holiday home comprised both wealth tax and an element of non residents income tax.  The wealth tax declaration no longer needs to be made, but the tax on the deemed rental income from the property will still be payable via a separate return.

The deemed income earned is equal to 2% of the property’s catastral value. Where the catastral value has been reassessed since 1^st January 1994 the deemed income drops to 1.1% of the catastral value but in the absence of a catastral value the it’s deemed to be 1.1% of exactly one half of the purchase price, or the escritura value if higher.

The income tax is then calculated at the non residents rate, which is currently 24%. Residents who own a 2^nd home are also charged tax on a deemed income arising from the 2^nd home. The deemed income is calculated in the same way as for non residents, but the rate of tax payable will be equal to your highest marginal income tax rate.

Historically, all foreigners wishing to live in Spain had to apply for a Tarjeta de Residencia, which was often thought of as a residence permit. In fact whilst in the days before Spain became a democracy Residencia was very much a permit, in practice in recent years it became simply an ID card. The Residencia card was an accepted form of identification everywhere in Spain.

From 28^th March 2007, UK (and other EU/EEA) nationals were no longer required to obtain a Residencia card. Instead, a new system of registration for Europeans was introduced whereby those wanting to stay in Spain for longer than 3 months needed to personally apply, before the end of their first 3 months of residence, at the local provincial Foreigners’ Office (usually located at the police station) to be registered in the Registro Central de Extranjeros.

After presenting various documents (different locations require different documents) usually including your passport and NIE certificate, you are presented with a certificate to confirm that you are registered. Due to the nature of the beast, unless your spoken Spanish is good, it’s better to pay a third party to go along with you to smooth the process.

The certificate differs from the old card in many ways; it’s bigger and more difficult to carry with you and because it’s a paper document, it’s quite flimsy; it doesn’t have a picture of you, so it’s no use as a form of ID in isolation, which means in certain circumstances that you need to carry a bulky passport with you as well. So, with the introduction of this new certificate we may have gained something, through elimination of the burdensome Residencia card application process, but we’ve lost the flexibility that the old card always gave us.

The British Embassy in Madrid recommends that British citizens in Spain always carry some proof of identity.

As the number of foreign property owners increased in the 1990s the Spanish authorities introduced a new tax charge whereby non resident owners were deemed to earn an income from their Spanish holiday home, even where no such income was being earned. The rational behind the decision to introduce this new tax was that non resident property owners derived certain benefits from the state e.g. civil defence, for which they are required to make a financial contribution. This new tax ran alongside the normal wealth taxes associated with Spanish situated property.

Over the last year the government has made several changes. Non residents have been affected in two ways. First of all, wealth tax has been all but completely abolished, and whilst it’s possible that it could come back in the future, wealth tax will certainly not be payable in 2008.

Following the change to wealth tax there has been understandable confusion amongst non residents about the continuing need to file a non resident’s tax return, stemming principally from its abolition. The current legal position is as follows.

If you are not resident in Spain and you own a Spanish situated property you still have to file a tax return in Spain every year. Historically, if you owned a property on 31^st December you had to file a wealth and deemed income tax return by the end of the following year e.g. property owned on 31^st December 2006 = return due between 1^st January 2007 and 31^st December 2007.

From 1st January 2009 onwards, if you are a non resident property owner you are no longer required to file a wealth tax return, but you are still required to file a non residents income tax return, and this return is due between 1st January and 30th June in the following year e.g. property owned on 31st December 2008 = return due between 1st January 2009 and 30th June 2009.

Capital gains in Spain are now taxed at the flat 18% savings rate. There’s no fixed annual allowance for gains so if you make a profit on the sale or transfer (except on death) of an asset, the chances are that you will have a liability to capital gains tax. The profits associated the division of assets following divorce, the profit on the sale of the main home for an over 65 and the sale of a shareholding in owner director companies are normally exempt.

The tax payable on the profit from the sale of the main home can be deferred providing the sale proceeds are used to purchase a new home within two years of the sale. To qualify for rollover relief you must have owned your home for at least 3 years or be selling it because of a change in your circumstances, such as a new job in a different area or the death of your spouse.

Interestingly, whilst this rollover relief can’t be claimed by a non resident, as long as they make their new home their main home, a resident could claim the allowance even if their new home isn’t situated in Spain. In fact, if the Spanish tax authorities disallowed such a claim they would effectively be restricting the free movement of people and capital within the European Union, which isn’t allowed in EU law.

Over 65’s are exempt from tax on the sale proceeds of their main home providing they’ve lived in it as a resident of Spain for at least 3 years.

Spanish capital gains tax legislation underwent a drastic change in 2006. Prior to 2006 profits earned from the sale of an asset which was itself acquired prior to 1987 were completely free of tax, and assets acquired post 1987 but pre 1994 were subject to a sliding scale of tax reductions. In addition the system discriminated against non residents, who were taxed at a higher rate than residents.

From 2006 the tax rate for residents and non residents was harmonised at the flat 18% savings rate, and the gains from assets sold post 2006 are apportioned between pre 2006 gains and post 2006 gains. The pre-2006 element of the gain is assessed under the old rules, where the amount of the chargeable gain is calculated by reference to the year of purchase and may be reduced both by the application of a factor to take into account inflation over the term of ownership and by the sliding scale of reductions applied to assets acquired pre 1994. The post 2006 element is reduced by an inflation factor and is then chargeable at 18%.

This new regime is very confusing, so I’ll illustrate by way of an example. A Spanish resident purchases a home in 1993 for €50,000. He sells the home in 2008 for €200,000. Without taking into account the inflation reduction factor and any allowable expenses, the gain will be assessed as follows: -

The term of ownership is 2008 – 1993 = 15 Years.

Gain = Selling Price – Purchase Price = €150,000.

The gain is apportion between pre 2006 (13/15ths) and the post 2006 (2/15ths).

Pre 2006 = 13/15 x €150,000 = €130,000, so the post 2006 = €20,000.

The gain from a pre 1994 acquisition is reduced by 11.1% for each year purchased prior to 1994. So for an asset purchased in 1993 the pre 2006 gain will be reduced by 11.1%, which in this example equates to €130,000 x 11.1% = €14,430. The taxable pre 2006 gain will therefore be equal to the gain less this reduction i.e. €130,000 – €14,430 = €115,570.

The taxable gain is the sum of the pre 2006 gain and the post 2006 gain = €115,570 + €20,000 = €135,570.

Finally, the capital gains tax due = €135,570 x 18% = €24,402.60.

The pre 2006 gains earned from the sale of assets other than property assets are subject to a slightly different regime, whereby the pre-1994 element of the gain is reduced by 25% for each year of ownership as opposed to 11.1% for property assets.