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Five things Britons need to know about inheritance tax in Spain

Spain’s inheritance tax laws are complex and differ considerably from the UK’s and other countries’ legislation. Jeremy Scudamore, who runs an Anglo-Spanish law firm in Madrid, explains what Britons in Spain should be aware of when dealing with inheritance tax.

Five things Britons need to know about inheritance tax in Spain
Spanish inheritance tax is divided into two parallel regimes. Photo: José Jordan/AFP

1. Spain now allows non-residents to have access to regional inheritance tax discounts

Until recently, Spanish law and many online tax declaration forms/platforms were set up so that inheritance tax deductions could only be claimed by residents in Spain. 

This was contrary to EU law on the basis that it contravenes the principle of free movement of capital within the EU and unfairly discriminates against non-Spanish residents who are tax residents in other EU states. 

In early 2020, the European Court of Justice pronounced that even non-residents from third (non-EU) states must be treated equally for inheritance tax (IHT) purposes in the same way as Spanish tax residents.

In December 2020, Spain’s General Directorate of Taxes announced that non-residents can apply the regional inheritance tax regulations, including deductions, either based on the deceased’s habitual address in Spain or where they have most of their assets.

2. There is no double taxation treaty between Spain and the UK regarding inheritance tax

However, in practice each country unilaterally sets off tax paid in the other country.

As it is the estate that pays inheritance tax (IHT) in the UK and each individual beneficiary/heir who pays Spanish IHT, a beneficiary who is a tax resident in Spain must justify to the Spanish tax administration the amount of tax paid on his or her behalf in the UK. 

To the extent that a beneficiary is tax resident in Spain and will receive his inheritance in Spain, English inheritance tax planning advice in respect of the tax position of the beneficiaries resident in the UK may well be detrimental to the Spanish tax resident beneficiary’s tax position and could result in additional and avoidable charges to Spanish IHT tax (“impuesto de sucesiones y donaciones” in Spanish) being paid. 

It is important to take advice from a Spanish IHT tax expert to coordinate the tax position between the UK and Spain to minimise any Spanish IHT payable by the beneficiary who is a tax resident in Spain.

3. The obligation to pay Spanish inheritance tax runs from the date of death of the deceased

Even though the estate assets may not be distributed to the beneficiary resident in Spain until sometime later (typically in the case of the sale of real estate), the delay in receiving the assets/proceeds will not affect the obligation in Spain to declare and pay IHT.

4. In Spain, it is not the estate that pays IHT as in the UK, but each individual who is liable according to the value of their inheritance. 

Heirs, unlike legatees (a person who receives a legacy), will inherit assets and debts and, if they accept the inheritance, will be responsible for these.

Beneficiaries should therefore exercise caution if any property they might stand to inherit is in negative equity.

READ ALSO: Why Brits in Spain should consider drafting a will now more than ever

5. Spanish inheritance tax is divided into two parallel regimes: the state IHT tax regime for non-residents and the regional IHT regimes for residents of those regions.

The regions vary significantly from one to another concerning the IHT tax payable and the various deductions and benefits which are applied. 

Moreover, the laws governing these regimes have not on the whole been adapted to the European case law concerning infractions by Spanish IHT laws of European law, thus creating a patchwork of law and obligations which can be difficult to navigate.

IHT tax in Spain is the subject of self-assessment tax returns so it is the taxpayer who declares the tax to the tax administration. 

If a taxpayer is unaware of any tax benefits or deductions that may be available to him and fails to claim these in his tax declaration, he/she cannot later claim this benefit. 

Similarly, he/she may find himself in the situation of paying excess tax and having to claim back the excess tax paid, which may take a considerable amount of time and is not without risk. It is important therefore that the taxpayer receives expert advice from a competent IHT tax advisor when declaring Spanish IHT.

Jeremy Scudamore is the founding partner of Scudamore Law , an Anglo-Spanish law firm based in Madrid with offices in London which has been providing services to English-speaking foreign investors in Spain for over 2 decades.

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What’s the inheritance tax in each region of Spain?

Inheritance tax varies greatly in Spain depending on what region you or your relations live in. Find out what the rates are in your area in 2022.

What's the inheritance tax in each region of Spain?

Spain’s inheritance or succession tax, known as ‘impuesto de sucesiones‘ is both complex and controversial, but it’s important to understand how it works in order to avoid any unfortunate financial surprises when a loved one with a connection to Spain passes away. 

Spanish inheritance tax is decided by the Spanish State but all of the country’s 17 regions have the right to change these rules to make them more beneficial or detrimental to heirs, luckily the general trend is towards the former. 

The succession tax rates will differ depending on how much is inherited, ranging from 7.65 percent on the first €7,933 up to 34 percent on €797,555+. 

There are many factors to consider, such as which category heirs and other beneficiaries fall into, or the fact that in Spain the spouse of the deceased is also subject to inheritance tax, which is not the case in the UK and many other countries.

What are the different groups of heirs in Spain?

As mentioned above, there are several categories or groups that heirs can fall into and this will depend on how much allowance they can benefit from. The groups are the following:

Group 1: Children under 21 years of age

Group 2: Children over 21 years of age, spouses and parents

Group 3: Siblings, nieces, nephews, as well as aunts and uncles

Group 4: Cousins or more distant relations

EXPLAINED: How choosing the right region in Spain can save you thousands in inheritance tax

What are the inheritance rates in my region?

Andalusia

In Andalusia, the inheritance tax rate varies between 7 percent and 36 percent, depending on the value of the inheritance. However, recently the Andalusian government approved, through a Royal Decree, a reduction of 99 percent, both for inheritance and gift tax for those who are included in groups 1 and 2.

Aragón

In Aragón there is 100 percent discount on the tax base, with a limit of €3,000,000 for descendants under the age of 21 or for those that have a disability. In addition, the spouse, parents or descendants of the deceased may also benefit from a reduction of 100 percent of the tax base.

Asturias

In Asturias there is an allowance of €300,000 for those groups 1 and 2. For all other groups, it establishes various reductions included in the state regulations. In addition, in case of inheriting a home, the bonus will be between 95 and 99 percent, depending on its value.

Balearic Islands

In the Balearic Islands, for those in groups 1 and 2, deductions of €25,000 are applied, plus €6,250 per year that the taxpayer is under the age of 21, up to a maximum of €50,000. For those in group 3, a deduction of €8,000 is applied and for those in group 4, it’s €1,000. An allowance of €48,000 will also be made for those with disabilities.

Basque Country

For those in groups 1 and 2 in the Basque Country, inheritances with an amount less than €400,000 are not required to pay taxes. When the amount is greater than €400,000, a tax rate of 1.5 percent will be applied.

READ ALSO: Why you should move to this region in Spain if you want to pay less tax

Canary Islands
Those in group 1 get an allowance of €47,859, while those in group 2 get an allowance of €15,957. Those in group 3 will get €7,993, while those in group 4 get no allowance at all. After the deduction, inheritance tax rates are calculated on the remaining balance which range between 7.65 percent and 34 percent on anything above €797,555.

Cantabria

For those in group 1, there is a reduction of €50,000 plus €5,000 for each year the taxpayer is under 21. For those in group 2, it’s also €50,000 and for those in group 3, it’s €25,000.

Castilla La-Mancha

In Castilla La-Mancha those in groups 1 and 2 will benefit from discounts ranging from 80 percent to 100 percent, depending on the amount of the payable base.

Castilla y León

Castilla y León allows reductions for children spouses and parents. Those in groups 1 and 2 will benefit from an allowance of €60,000. An additional reduction of €6,000 will be applied for each year the taxpayer is under the age of 21. A variable reduction will also be applied, which is calculated as the difference between €400,000, plus the sum of the previous amounts and the state deductions.

Catalonia

In Catalonia, spouses will receive a bonus of 99 percent and the rest of the heirs in groups 1 and 2 may apply a bonus that varies between 57 percent and 99 percent, depending on the tax base.

Extremadura

A bonus of 99 percent is applied for amounts of up to €300,000 euros between parents, children and spouses.  

Galicia

In Galicia, heirs in group 1 have an allowance on amounts up to €1,000,000, plus there is a reduction of €100,000 for each year the beneficiary is younger than 21, with a limit of €1,500,000. For those in group 2, the reduction varies between €900,000 and €400,000, depending on the taxpayer’s age. In the cases of groups 3 and 4, the bonus will be €16,000 or €8,000. The applicable rate in Galicia stands at between 5 and 18 percent, which is well below the rest of the regions. 

La Rioja

Those who inherit in La Rioja benefit from a deduction of 99 percent of the tax quota if the tax base is less than or equal to €500,000. The deduction will be 98 percent for amounts that exceed €500,000.

Madrid

Madrid applies a discount of 99 percent of the tax quota for taxpayers included in groups 1 and 2. In addition, for the heirs included in group 3, it establishes a discount of 15 percent or 10 percent, depending on what relation they are to the deceased.

Murcia

In the region of Murcia, the law includes a deduction of 99 percent for those in groups 1 and 2. Likewise, for the rest of the heirs, it also recognises different reductions depending when the money is inherited and the amount to be received.

Navarre

In Navarre no discounts are applied, but how much tax varies according to what group you fall under. Spouses for example have a rate of 0 percent up to €250,000, and 0.80 percent from there upwards. In the case of descents and parents, the applicable rate varies between 2 percent and 16 percent.

Valencia

In Valencia discounts of 75 percent are applied for those in group 1 or 50 percent for those in group 2. In case the of those with disabilities, the taxpayer will also receive a bonus of 75 percent.

Case study example

For example, in the case of a 30-year-old son who inherits assets worth €800,000 euros, the most amount of tax would be paid in Asturias, with at €103,135.48; followed by Castilla y León €81,018.76; Valencian €63,193.76; Aragon €55,466.81; La Rioja €32,342.86; Castilla-La Mancha €31,759.23 and the Canary Islands €31,748.63. 

These regions would be followed by Navarre €17,000; Catalonia €9,796.89; the Balearic Islands €5,950; the Basque Country €3,150; Murcia €1,640.49; Extremadura €1,587.96 and Madrid €1,586.04). Andalusia, Cantabria and Galicia have a net quota of 0.

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