Considerations for foreign owners and beneficiaries following the 2015 reforms of Spanish Inheritance Tax (IHT)
Unlike other countries, such as the UK, where IHT is paid at source by the estate´s executor pursuant to universal rates and allowances (and therefore inheritances are accepted by beneficiaries net of tax), Spanish IHT is calculated and paid separately in respect of each beneficiary.
Another factor contributing to the complexity of the situation has been the regional devolution of regulatory and tax collection powers in respect of IHT to Spain´s autonomous communities. Pursuant thereto, IHT rates are set at the national level, whilst non-table reliefs and allowances are regulated at the regional level.
- Discrimination against foreign owners
The above results in numerous uncertainties because each beneficiary pays tax individually and the total taxable amount would vary significantly depending on which regional laws apply. However, the main issue of concern was that regional laws discriminated against foreign beneficiaries, by insisting that they had to be tax domiciled in Spain as a pre-condition for taxable reliefs and allowances.
Needless to say, this situation was grossly unfair and discriminatory towards foreign owners on the Costa del Sol even if they became tax domiciled in Spain. Beneficiaries who were not tax domiciled in Spain (who often consisted of the spouse or co-owner of a holiday home or any children living abroad) were forced to pay tens of thousands of euros in IHT shortly after the death of a loved one (which for most properties consisted of 15- 34% of the cadastral value). In fact, there were numerous instances of distressed sales well below market price in order to meet tax obligations. In other cases, beneficiaries simply did not declare the death of owner to the tax office. This scenario has placed many families in a legal limbo, because the property cannot be sold and remains registered under the name of the deceased.
- EU Judgment against Spain
From the perspective of the EU, Spain was acting contrary to the single market and the principle of non-discrimination, because beneficiaries from across the EU who were not tax-domiciled in Spain paid higher levels of tax than their Spanish counterparts. This generated numerous complaints by the EU Commission as far back as 2010, which ultimately resulted in a judgement from the EU Court of Justice in September 2014.
The EU judgment did not affect the different levels of taxation across Spain in respect of each autonomous community. However, Spain was deemed to have acted in bad faith and contrary to EU Law by failing to abide by the numerous complaints raised before the judgment. Therefore, in addition to nullifying any discriminatory requirements in respect of the applicability of IHT reliefs and non-taxable allowances, the judgment has been given retrospective effect, so any beneficiaries who were discriminated can now make a recovery claim against the Spanish state.
- Practical considerations for co-owners, family members and beneficiaries in general
Although, on the whole, the change in law favours most foreign beneficiaries on the Costa del Sol, the implications of the recent EU judgment need to be assessed on a case-by-case basis.
Prior commencing a claim against the Spanish state, it should be noted that the EU judgment only applies in respect of beneficiaries who are tax-domiciled in the EU (instead of EU citizens per se). For example, if a beneficiary is based in Russia or is a British citizen who is tax-domiciled in a non-EU jurisdiction (such as Jersey, Isle of Man or the USA), the judgment will not grant him or her any recovery rights.
Moreover, although the EU judgment applied retrospectively, claimants ought to consider the standard four-year limitation period for tax claims in Spain. Claims issued before this period will have a higher level of success because the Spanish tax government has enacted a special recovery procedure at the administrative level. With respect to claims issued outside the limitation period, the situation becomes more complicated because the only way to recover any amounts would be by initiating a judicial review case before the courts.
In addition to timing considerations, the location of the property will have a significant impact on the recovery and applicability of IHT. This is because the EU judgment does not eliminate the different levels of tax applicable across Spain´s autonomous communities. Consequently, the amount recoverable and the merits of a claim will depend considerably on the location of the property and other assets forming part of the estate. By way of example, on the Costa del Sol (and Andalusia in general), the general tax allowance applicable to close family members only applies to estates with a value of up to €175,000. As a result, if the declared value of the estate exceeds this amount, the beneficiaries are unlikely to benefit from a reduction of the applicable tax.
Last but not least, per the above, many co-owners and beneficiaries did not declare the death of a loved one (because the Spanish government unfairly demanded circa 15- 34% of the cadastral value within 6 months from the date of death). These parties are strongly advised to contact us in view of the fact that EU judgment applies retrospectively and the acceptance of the inheritance is a prerequisite for selling the property (or otherwise regulating the situation in accordance with the law).
Unfortunately, as a result of the EU judgment, there are now many advisors (some of which are not even lawyers) who are disseminating misinformation and charging substantial recovery fees, simply for filing forms without considering wider implications. Therefore, readers are advised to obtain an initial legal assessment from us prior to initiating a claim or otherwise regulating their situation.
About the Author
Lucas Bornico is a Partner at BF Solicitors (Bornico, Farquharson & Associates). He is a Solicitor (England & Wales) with numerous years of experience in London and Spain (where he is duly registered as an EU lawyer with the Spanish Bar Association).
BF Solicitors is a boutique law firm of English and Spanish lawyers, which specialise in advising international clients on the Costa del Sol.
Their partner-led practice is able to provide a comprehensive service in respect of the areas that matter most to our clients, including property, conveyancing, tax, wills & inheritance, wealth management, family law, litigation and cross-border commercial & corporate transactions.
This article is intended to provide a general overview on the purchase of a property in Spain and should not be deemed to constitute legal advice. Before relying on this article and entering into a transaction, readers are strongly advised to contact BF Solicitors for a free and confidential consultation.
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