Owning a Spanish Property Means Tax Planning
It has long been understood that British nationals are inclined to throw in the towel with the UK climate and culture (although at the time of writing this the thermometer shows a more than acceptable temperature of 28 degrees!) and invest time and effort selecting another country of residence. Although warmer climates may be attractive, they have taxation and succession issues to grapple with and well cited investment risks alongside. In this article Private Client Partner Elizabeth Young and Spanish Abogado and Solicitor Ignacio Morillas-Paredes of Brethertons LLP outline some of the more common challenges related to owning a property in Spain and the consequences of living la vida loca.
Spanish Law differs from UK Law, of course, and in Spain there are many legal inconsistencies across certain regions, so wherever you decide to buy your property, you’ll need to investigate your region’s own specific legalisation and consequences seeking the local advice of a specialist well versed in the issues.
Spain operates Spanish Succession Tax (SST) which as an inheritance tax equivalent. In Spain, upon death, named beneficiaries to whom the property passes each have to pay the SST tax, Spanish Wealth Tax having been scrapped in 2008.
If you die in Spain owning Spanish property, without a Spanish or UK Will, your property will be subject to Spanish ‘Intestate’ laws. Your nominated heir (which can be your spouse of course) has to obtain a declaration of heirs from a Spanish Notary who needs to put the affairs of your estate in order. The Spanish law will recognise the deceased’s nationality applying the inheritance laws of your country of origin, recognising the deceased’s nationality or country of domiciled residence; this is even if the deceased has been living in Spain for some years and is technically ‘resident’. It can become complex if the deceased has several properties in several country jurisdictions, where perhaps the meaning of ‘domiciled’ and ‘residency’ have different meanings.
If you are a UK domiciled national and you have made a Will in the UK but you die in Spain having made no Spanish Will, Spanish Succession Tax will govern the ‘inheritance tax’ on your Spanish estate.
SST is payable by the heir(s) within six months of death, although this period can be extended for another six month period before penalties and interest kicks in. Each heir will have their own taxable allowance to offset against their SST tax liability which can be as much as nearly 82% of the shared value of the estate. The rates of tax range from 7.65% to 81.6% depending on the region of Spain where the deceased resided compared of course with the UK where 40% inheritance tax applies after allowances. SST must be paid before beneficiaries have access to the inherited assets.
There is a bilateral Relief Treaty in place between the UK and Spain which recognises that you do not have to pay for tax twice on the same inherited asset but it is disputed whether you have to pay both UK Inheritance Tax (which is chargeable on the deceased’s estate as a whole) as well as Spanish Succession Tax (which is targeted at individual beneficiaries). A clear ruling on this point is awaited.
Unmarried couples and step-children usually pay more SST than spouses and natural children. It is recommended that if you own Spanish property, you should also make a Spanish Will for avoidance of doubt about the transfer of property upon death. This is particularly relevant where there has been more than one marriage and several children whom might be beneficiaries. Interested parties can apply to the General Wills Registry in Madrid to search for Spanish Wills having been made by family members who owned property. Under Spanish law, children, whether born in or out of wedlock, and spouses, will always be entitled to claim their share.
If you have made a Will in the UK, and you have made a Will in Spain before you die, then both Wills could well come into force: in other words, the UK Will covers your UK interests and your Spanish Will covers your Spanish interests, where the heirs of the Spanish property and assets will still be liable to pay their SST demand. When making consecutive wills in numerous jurisdictions the documents should be clear on the clients domicile, residence and which assets the Will pertains to cover, the Wills must also not be capable of revoking earlier foreign element Wills and accidentally give rise to intestacy.
Trusts used in the UK for various purposes including reduction of Inheritance Tax and Asset preservation are not recognised as entities in Spain. Instead Spain recognises ‘Usufructos’ and ‘Testaferros’ which operate differently to Trusts but which can provide a legally recognised agreement whereby, say, a child might want to buy the Spanish property from the parent(s) whilst the parents are still living with a view to minimising their own SST exposure later on. This type of agreement is common in Spain and worth looking into, however, you should avoid large gifts or donations as these also bring with them tax implications of their own.
Other tax planning structures in Spain include: buying the property jointly with future inheritors at the time of purchase; selling the property wholly to the inheritors, but these options are both subject to transfer tax on the value of the shares transferred and can leave the ex-pat parent(s) exposed to the goodwill of their children who now own the house; also taking out a mortgage on the property to reduce the value of the property for tax purposes thereby mitigating the liability; or buying or owning the property through a Spanish Limited Company with no transfer tax applicable on the transfer of company shares, but this cannot take place within a year of actual incorporation; or, alternatively, buying the property through another EU company taking advantage of the after death taxes of where that company is domiciled, but which can lead to complicated tax liabilities in more than one country.
If you plan to leave your Spanish property and assets to your heirs without wishing for them to have lots of delay and red tape then each beneficiary will need what is called a NIE number. This is a personal Spanish tax number. An NIE number can be applied for, for all beneficiaries, whilst the property owner is still living.
Liability for SST can still come as a shock to British expatriates, especially when one spouse had died, leaving their Spanish property to their life long partner, only for them to receive a hefty SST tax demand due shortly after the death and before all the estate issues have been finalised.
At Brethertons we recognise that owning a Spanish property can lead to uncertainty about your foreign obligations and we recommend that you plan well ahead before you buy the property.
The recommended approach for property owning expatriates is to plan ahead and ensure you have both a UK Will and a Spanish Will. If you are purchasing assets abroad you should speak to a Spanish specialist and understand the local nuances of property, inheritance and succession taxation rates. You should be aware of the UK and Spanish tax requirements and you should inform the beneficiaries of your Spanish assets of your intentions in order for them to minimise their potential tax exposure and to apply for an NEI number, which can remove huge delays and increased tax liabilities later on. Keep all your paperwork in order and let your beneficiaries know where it is kept. This includes local vehicle tax payments and property rates payments evidence and details of joint bank accounts.
We recommend that your UK Will is updated shortly after the property purchase and that you also prepare a Spanish Will with a reputable firm. Spanish Wills can easily be provided translated into English.
Another broad area for consideration is the impact of physical on particularly mental incapacity on property ownership in Spain, although we are not sure we can offer any simple solution we would recommend that part of the planning process is that ex-pats ensure that they have attorneys appointed in case of difficulties arising. We have acted both for attorneys under a registered Lasting Power of Attorney and as deputy for a client incapacitated by the brain damage he sustained in a Spanish hit and run accident when he was knocked off his motorbike, in both cases the attorney/.Deputy has attempted to sell the Spanish owned Property. The process will undoubtedly involve an application for a specific order under the new Mental Capacity Regime which in itself can take weeks or months even with a pre-prepared and registered LPA. This then has to be notarised or in the extreme fitted with an apostille stamp and weeks/months of wranglings between the UK and the Abogado dealing with the sale (on our behalf and the lawyer acting for the purchaser with various translated documents along the way and the threat of the Deputy at one stage having to pack their bags and travel to Almeria ready for completion day ! Good luck – but better a registered LPA in place than not ! At least that saves you 3 months of nervous waiting to see if the Court of protection have lost the papers.
Clients of Brethertons are able to create and purchase their basic UK Wills easily over the internet at www.lawsense.co.uk and more complex international Wills probably require a face-to-face meeting with a solicitor.
