Inheritance tax is something that all families must come to terms with at some point in time. Regardless of whether you feel it is a good or bad tax, (I guess nobody thinks that any sort of tax is a good one!) it has to be paid by law, and Spanish inheritance tax or Impuesto sobre Sucesiones y Donaciones (ISD), in particular is considered by many to be quite harsh. As there seem to be several popular yet different explanations of how Spanish inheritance tax operates, I thought I would try and simplify its workings in order to help you understand it a little more, and explain why it is important that you should make a Spanish will at the earliest possible opportunity.
There is a popular misconception that if you do not make out a Spanish Will that your estate will be handed over to the government. You can however rest assured that this is definitely not the case. Whether or not you have a Will, your estate will eventually pass on to its rightful inheritor(s) according to Spanish law; however, without a Will the process can take much longer to be finalised. You are only liable for ISD if you are a Spanish resident, and if the property you are bequeathed is situated here in Spain.
The workings of ISD are quite complicated, and it is recommended that you should seek advice from a professional expert in order to avoid any confusion or misunderstandings, but in general, unmarried partners and stepchildren are liable to pay more inheritance tax than married spouses and their natural children.
Allowances or thresholds on Spanish inheritance tax vary according to the inheritor’s relationship to the deceased, and can also differ depending on geographical location. For example some ACs (Autonomous Communities) such as Communidad Valenciana, Balearics, Cataluña, Murcia and Madrid for example, may waive as much as 99% of the inheritance value liable for tax, providing certain conditions are met. However, this only applies to spouses and natural children who are Spanish residents; non-residents must pay the full amount of inheritance tax as dictated by the state.
In Andalucia, those who are resident or non-resident and in Group 1 and 2 below are entitled to receive an inheritance of up to €1,000,000 tax free per inheritor (From 1st of January 2018). After this amount, the rates for each group below will apply to the remaining amount. This will also mean that British citizens who have property and estates in Spain will be exempt from inheritance tax.
In Cataluña spouses and unmarried couples who are registered as a pareja de hecho may benefit from allowances of up to €500,000. Each child also have an allowance of up to €275,000 (plus extra €33,000 for each year under 21 up to maximum of €539,000).
Under Spanish Inheritance Tax law, beneficiaries are classified in four groups.
Group 1 comprises of any natural or adopted children under the age of 21. Inheritors within this group are entitled to €47,859 before having to pay inheritance tax.
Group 2 is the same as above, but for relatives (including spouses) who are aged 21 or over. This group enjoys the same threshold of €15,956.87. This group will include children (including adopted), grandchildren, spouses, parents and grandparents. Some regions may also recognise unmarried partners (Parejas de Hecho).
Group 3 encompasses in-laws and their ascendants or descendants, including step-children, brothers and sisters, auntie's and uncles, nephews, nieces, and cousins. Benefactors in this group are entitled to a tax threshold of €7993.46 after which they will be expected to pay tax.
Group 4 is made up of all others including unwed partners, and the threshold for benefactors in this group is unfortunately zero.
With regard to the main home bequeathed in a Will, the state makes an allowance of 95% of the value of the property, up to a ceiling of €122,606 per benefactor. This is however, only in relation to relatives as defined in groups one and two. It does however, also cover a more distant relative who is aged 65 or more, and who was living with the deceased for a period of two years leading up to their death. Another rider is the fact that any beneficiaries must retain ownership of the property for a period of 10 years, whether or not it is their main residence.
The rate of ISD can vary enormously from 7.65% to 34%. In some cases it can reach a whopping 82% if the benefactor already has a certain level of wealth.
I hope that this short article has given you an insight into Spanish inheritance tax, an idea of how it works, and what your relatives may be liable for upon your death. There are ways to mitigate some inheritance tax, but in order to do so legally and above board, you should consult with an inheritance tax expert.
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November 26, 2014