How to calculate the Inheritance tax in Spain for non-residents

Tulips Quite often I am asked how much is the tax payable on a Spanish estate. My first answer to that question is that the tax is not paid by the estate but is paid by each beneficiary on the basis of what he or she inherits. My second reply is that the Inheritance tax is calculated on a sliding scale where some coeficients are applied depending on the value of the asset inherited. It is therefore quite difficult to give a quick estimate without having the calculation rates next to me. Rather than using this post to talk about all the intricacies of Spanish Inheritance taxes, I think it would be useful to set up a case study with some imaginary names which would give the reader a taste of how the tax is calculated in Spain.  

Paul Herbert, British national, resident in Manchester dies in the UK on the 18th March 2012. He was divorced and had one daughter. He had assets in the UK and in Spain. There was a Spanish Will dealing with the Spanish assets and a Will dealing with the UK assets.

He left all his Spanish assets to his daughter, Isabel, who is 40 years old and lives in Birmingham. The funeral took place in the UK. The estate comprises a property in Marbella worth 295,000 euros and a bank account with 5,000 Euros. The property had no mortgage.

The house did not have any valuable assets, just the usual furniture for a house of this type.

The daughter is British and has never lived in Spain.

INHERITANCE TAX CALCULATION RATES (€)

 

Tax Base 
up to (€)

Tax liability
euros

Remaining Tax base up to
(€)

Applicable Rate

 

0.00

7,993.46

7.65

7,993.46

611.50

7,987.45

8.50

15,980.91

1,290.43

7,987.45

9.35

23,968.36

2,037.26

7,987.45

10.20

31,955.81

2,851.98

7,987.45

11.05

39,943.26

3,734.59

7,987.46

11.90

47,930.72

4,685.10

7,987.45

12.75

55,918.17

5,703.50

7,987.45

13.60

63,905.62

6,789.79

7,987.45

14.45

71,893.07

7,943.98

7,987.45

15.30

79,880.52

9,166.06

39,877.15

16.15

119,757.67

15,606.22

39,877.16

18.70

159,634.83

23,063.25

79,754.30

21.25

239,389.13

40,011.04

159,388.41

25.50

398,777.54

80,655.08

398,777.54

29.75

797,555.08

199,291.40

onwards

34.00

 

We know that the property was worth 295,000 Euro and that there was 5,000 Euro in the Spanish bank. The tax calculation would be as follows:

 

Real value

300,000

Chattels

9,000 (300,000 x 3%)

Gross Estate

309,000

Expenses  

0

Net Estate

309,000

Taxable Base

309,000

Allowances

Kinship (descendants)

15,956.87

Final taxable Base

293,043.13

Tax liability

 

Up to 239,389.13
Rest up to 293,043.13 (53,654) x 25.50%

Total

  40,011.04
                                                13,681.77

53,692.81

Multiplying rate

1.00 (She has no pre-existent estate in Spain and is the daughter of the deceased)

 

Inheritance tax

 

53,692.81

 How did we get this figure?

The real value is 300,000 € and this includes the value of the property (295,000 €) and the balance in the bank account (5,000 €). When there are no relevant chattels Spanish laws consider that the value of the chattels is 3% of the real value. That is why we have this amount of 9,000 € shown as chattels (300,000 € x 3%).

The funeral expenses were incurred in the UK and therefore cannot be deducted as an expense. We are then left with a Net Estate of 309,000 € which will be used as the Taxable base to which the necessary bases and percentages apply. But before applying any bases or percentages we need to apply the necessary allowance which will vary depending on the kinship. Children have an allowance of 15,956.87 € and therefore the final taxable base will be 293,043.13 € (Taxable base – Allowances).

It will then be a case of applying the tax base and percentages indicated in the table at the beginning of this document. This is done in two stages:

–       Up to 239,389.13 € the amount to pay will be 40,011.04 €.

–       The rest up to 293,043.13 € (in particular 53,654 €, which is the difference between 293,043.13 € and 239,389.13 €) will be calculated applying the appropriate percentage which is 25.50% leaving a second amount of 13,681.77 € to pay.

The tax liability will be the sum of both amounts (40,011.04 € + 13,681.77 €) = 53,692.81€.

Finally, a multiplying rate has to be applied depending on two factors: kinship and the value of the previous estate of the beneficiary in Spain. If the latter is less than 402,678.81 € then the multiplying rate will be 1 (which is the case of the daughter as she has no previous assets in Spain)

The Inheritance tax to be paid by Isabel will be the tax liability (53,692.81Euro) multiplied by the multiplying rate 1 = 53,692.81

Tax to pay is 53,692.81 €

The IHT paid in Spain can be offset in the UK to avoid double taxation.

 

Lets talk about gifts

 

 

 

In this space I have talked about wills and inheritances very often but never, as far as I can recall, about gifts. Is it generally a good idea to gift assets in Spain? The answer is also generally no. Why? For one simple reason: taxes.

 

A gift will always be subject to gift tax which is also higher than the inheritance tax. This means that if you gift your property in Spain to your children, they will pay more taxes that what they would have paid should they have inherited this property after your death. This clearly puts off many property owners from gifting their properties in life rather than on a will, and therefore on death. However, this option can still be considered if the recipient of the gift requires the property now rather than later. For instance, if you have a property in Spain that is empty and your daughter has moved to Spain and wants to settle there, gifting the property may prove useful for her. Ok, she will have to pay gift tax but on the other hand she will not have to get a mortgage and buy the property paying high interests to the lender.

To summarise, a gift is not always a “no-no”. In some certain cases can prove useful and the high tax payment can be offset by certain advantages of transferring the property now rather than later but careful consideration should be given before embarking in this transaction. Otherwise, it could prove unecesarily costly.

Picture provided by www.dreamstime.com

To value or not to value? That is the question.

 

The other day a client was in the process of filing an Inheritance tax form and he asked me which value he had to give to a Spanish property he had just inherited. In England the answer is quite simple: you must use the open market value. This generally means getting the property valued. In Spain the situation is, as usual, quite different.

Spanish law states that it should be the “real value” but there is no clear definition as to what the real value is. There is some guidance as to what could be understood as “real value”. For instance, the price shown on the deeds when the property was purchased or the value used by the tax office the last time the property was assessed by the tax man. However, the most common practice is to use the fiscal value. This is obtained applying a specific multiple to the rateable value of the property, which is usually shown on the annual property tax receipt.  

In the end, what happens in most of the cases is that the beneficiaries give the values that they consider appropriate and then these values are assessed by the Tax office. If the Tax office believes that the property is worth more, the Tax office will issue a tax request for the difference and any interest accrued.

In my opinion, it is advisable to use the market value and ensure that this value is definitely higher than the fiscal value. However, each case needs to be looked separately as there could be many factors affecting the final decision i.e. was the property  purchased a few years before the death? is there an intention to sell the property in the short future, etc.

What is clear is that if you are an executor of the estate, both English and Spanish, then the best way to proceed is to get the property properly valued and use that value for tax purposes, both in England and Spain. Otherwise, there could be some personal liabilities for the executor.

Picture by www.dreamstime.com

To be, or not to be, that is the question:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles,
And by opposing end them? To die, to sleep,
No more; and by a sleep to say we end
The heart-ache, and the thousand natural shocks
That flesh is heir to: ’tis a consummation
Devoutly to be wished. To die, to sleep;
To sleep, perchance to dream – ay, there’s the rub:
For in that sleep of death what dreams may come,
When we have shuffled off this mortal coil,
Must give us pause – there’s the respect
That makes calamity of so long life.
Hamlet by William Shakespeare

 Amazing monologue of the genius William Shakespeare. By the way, who do you think has best incarnated Hamlet on the silver screen? Many generations think of Laurence Olivier.  Personally, I really enjoyed Kenneth Brannagh’s take on Hamlet