A question I get very often, both from executors dealing with UK estates and from UK solicitors who find themselves handling the affairs of a deceased client who also happened to have assets in Spain.

Before diving into the core of the question, let’s start with the basics. One thing is the UK estate and another is the Spanish one — and it is paramount to understand the distinction between the two. Each estate is subject to its own inheritance tax regime, and grasping this early on is essential for anyone involved in the administration of a cross-border estate.

THE TWO LAYERS OF INHERITANCE TAX

On the one hand, inheritance tax (IHT) will arise in the country of domicile of the deceased. In the UK, this means that if the deceased was UK-domiciled, HMRC will charge IHT on the entirety of his or her worldwide estate — Spanish assets included — at the familiar rate of 40% above the available nil-rate bands. On the other hand, Spain will levy its own inheritance tax (known as the Impuesto sobre Sucesiones y Donaciones, or ISD) on the Spanish assets alone, irrespective of where the deceased was domiciled.

The question that always follows is: does this mean the beneficiaries pay tax twice on the Spanish assets? Fortunately, no — though I should clarify the mechanism, because it is not quite what many people assume. There is no bilateral double taxation treaty between Spain and the UK specifically covering inheritance tax. What exists instead are unilateral relief provisions in each country’s own domestic legislation. In the UK, section 159 of the Inheritance Tax Act 1984 allows credit for foreign tax paid — such as Spanish ISD — against the UK IHT liability attributable to the same assets. Spain has an equivalent unilateral relief mechanism under its own domestic IHT law. The practical effect is that tax paid in one jurisdiction can be offset against the liability in the other, but it is worth being clear that this is not a bilateral guarantee; it is a domestic relief that each country grants on its own terms. This is a topic that deserves a dedicated article, and I will cover it in more detail in a future post.

WHO ACTUALLY PAYS THE SPANISH IHT?

This is the crux of the matter, and it is where the two systems diverge most sharply.

In the UK, the estate itself is the taxable entity. The executors discharge the IHT liability from the estate’s own funds before distributing anything to the beneficiaries. No personal liability falls on the beneficiaries themselves; the bill is settled at the estate level.

In Spain, the position is fundamentally different. The IHT is paid by each beneficiary personally — not by the estate. Unless the deceased left a Spanish bank account with sufficient funds to cover the tax (and even then, it is technically the beneficiary who makes the payment), each beneficiary must find their own funds to satisfy their individual IHT bill. This regularly comes as a shock to families used to the UK system who assume the estate will simply deal with it.

There is also a critical practical consequence: the Spanish IHT must generally be paid before the Spanish property can be transferred or sold.

Nothing stops the UK estate from advancing funds to help cover the Spanish IHT on behalf of the beneficiaries. However, from a Spanish tax perspective, the payment will always be treated as having been made by each beneficiary from their own resources, regardless of where the money originally came from. The source of the funds does not alter the Spanish tax analysis.

HOW IS THE SPANISH IHT CALCULATED?

This is where things become more nuanced and where the Spanish system differs quite significantly from the UK’s relatively straightforward approach.

Spanish IHT is assessed separately on each individual beneficiary’s share of the estate. The tax is progressive, with national rates ranging from 7.65% on the first tranche of the taxable base up to 34% on amounts exceeding approximately €797,555. However — and this is crucial — Spain’s seventeen autonomous communities each have their own IHT rules and, in many cases, have introduced very generous reductions that can dramatically reduce or even eliminate the tax burden altogether. The community whose rules apply will generally be the one where the deceased was habitually resident (for Spanish residents). For non-residents — such as UK nationals whose main connection to Spain is a holiday property — the rules of the community where the majority of the Spanish assets are located will typically apply.

This regional variation is one of the most important features of the Spanish IHT system and one that is frequently overlooked. A beneficiary inheriting a property in Madrid, for example, may face a very different tax bill from one inheriting a comparable property in Valencia or Barcelona, even if their kinship with the deceased is identical.

A further layer of complexity is the wealth multiplier coefficient (coeficiente multiplicador). Once the applicable tax rate has been determined, it is multiplied by a coefficient based on the beneficiary’s pre-existing personal wealth. The wealthier the beneficiary, the higher the coefficient applied, which can increase the effective tax rate by up to 2.4 times in the most extreme cases. This is an aspect of the Spanish system that is easy to overlook but can have a material impact on the final bill.

ALLOWANCES AND KINSHIP GROUPS

Personal allowances under Spanish IHT law vary considerably depending on the relationship between the deceased and the beneficiary. The law groups beneficiaries into four kinship groups:

• Group I — descendants under the age of 21 benefit from the most generous allowances: a base allowance of €15,956.87, plus an additional €3,990.72 for each year under 21, capped at a total of €47,858.59.
• Group II — descendants aged 21 or over, spouses and ascendants receive a base personal allowance of €15,956.87.
• Group III — collateral relatives of the second and third degree (brothers and sisters, nieces and nephews, aunts and uncles, and in-laws) receive a considerably more modest allowance of €7,993.46.
• Group IV — more distant relatives and those with no family connection whatsoever to the deceased receive no personal allowance at all, and can face very substantial tax bills on what they inherit.

As noted above, autonomous communities can and frequently do supplement these national allowances very significantly. In Madrid and several other regions, spouses and children can benefit from a near-total exemption from IHT regardless of the value of the estate. This is precisely why taking region-specific advice is so important.

Because kinship group, autonomous community rules, and pre-existing wealth all feed into the calculation differently for each person, a separate IHT form must be completed for each beneficiary individually, and each will receive their own distinct tax bill.

TO SUMMARISE

The Spanish IHT is not paid by the UK estate but by each beneficiary personally. Different beneficiaries will pay different amounts depending on their relationship to the deceased, the autonomous community where the Spanish assets are located, and their own pre-existing financial circumstances. The UK estate can advance funds to assist beneficiaries in meeting their Spanish IHT liability, but this does not alter the Spanish tax treatment. And any IHT paid in Spain can be offset — under each country’s domestic unilateral relief provisions — against the IHT due in the UK on the same assets.

If all of the above makes sense, then my job of informing the potential beneficiary or administrator of a cross-border Spanish-UK estate has been done. If it didn’t — or if you have questions about your own situation — please feel free to reach out through this blog. I am always happy to help untangle the intricacies of the Spanish tax system. Where I can!!