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Spanish Succession Tax- The Impact of Location in Spain

Spanish Succession TaxPosted by Anne Fri, June 02, 2017 20:52:25

Background

It is well over 2 years now, since the European Court of Justice's Ruling, that the Spanish Tax Authority’s succession tax system conflicted with the European Union principles of freedom of movement of EU individuals and circulation of money within the EU.

That case was specifically in relation to the distinction the Spanish Tax Authority previously made between those who were resident in Spain; and those who were non-resident.

The Ruling was that Non-Spanish Residents (who were also Europeans) should be treated in the same way as Spanish residents, for the purposes of Spanish Succession Tax.

Following the Ruling, Spain revised its practice, as required; and now (for example), British owners of Spanish properties are treated in the same way for Spanish Succession Tax purposes, irrespective of whether or not they are resident in Spain.

But although the Spanish Tax Authority is now compliant in terms of the Spanish residency/ non- Spanish residency distinction, there remains a separate glaring inconsistency in approach, which also amounts to discriminatory treatment of EU individuals.

That is the different levels of Spanish Succession Tax impact, according to which Autonomous Community within Spain is the charging Tax Authority in the case in question.

Continuing Discrimination

In many countries, the calculation and charging of succession taxation is simplicity itself. However in Spain, it is a highly complex system, which creates a great deal of uncertainty, inconsistency and controversy.

Spanish Succession Tax is not always administered centrally; nor is it charged in a uniform way nationally; nor is it charged at a single rate; nor is it subject to universal national allowances and reductions.

At the heart of the complexity is the fact that for Spanish nationals/ Spanish residents, the responsibility for Succession Tax administration lies with the 17 individual autonomous communities within Spain. Each autonomous community has discretion as to charging basis; practice; and allowances/ exemptions.

This fiscal quagmire creates bewildering inconsistencies across Spain. On the attached image, the Spanish Succession Tax impact is indicated, based on the same Estate details, but varying according to which is the applicable Autonomous Community.

And, as a very noteworthy side issue, it is not only foreign owners of Spanish properties who are exposed to the unfairness of this perplexing system; but it has been acknowledged that many Spanish families living in Spain themselves suffer this arbitrary discrimination under the current system, according to where (in Spain) their family members live.

Conclusion

It remains to be seen whether this very worrying anomaly will be regularised by centralizing/ standardising administration of Spanish Succession Tax; or (if that is deemed too radical), at least a harmonisation of practice across Spain.

For non- Spanish owners of Spanish properties, they are fortunate, in that there are opportunities in Spanish Wills and estate planning, to mitigate this exposure to Spanish taxation; and expert advice is recommended to ensure that the fiscal impact is minimised; in planning for future inheritance.

This general commentary is not intended to be exhaustive; and case-specific legal advice should always be sought.

The Legal 4 Spain team provides a full Wills, Estate Planning and Probate service for properties and other assets anywhere in Spain. We are always happy to provide a competitive cost estimate in the first instance, on a no-obligation basis.



Spanish Succession Tax- In Anticipation of Brexit...

Spanish Succession TaxPosted by Anne Tue, May 09, 2017 22:26:45

Background

It is well over 2 years now, since the European Court of Justice's Ruling that the Spanish Tax Authority’s succession tax system conflicted with the European Union principles of freedom of movement of EU individuals and circulation of money within the EU.

That case was specifically in relation to the distinction the Spanish Tax Authority previously made between Spanish Residents and Non-Spanish Residents.

The Ruling was that (European) Non-Spanish Residents should be treated in the same way as Spanish residents, for the purposes of Spanish Succession Tax.

Following the Ruling, Spain (as required) revised its practice; and now, British owners (for example), of Spanish properties, are treated in the same way for Spanish Succession Tax purposes, irrespective of whether they are resident in Spain or not.

Brexit

It is considered probable by most commentators, that the Spanish Succession Tax treatment of British owners of Spanish properties is likely to change again in the light of the Brexit Referendum decision.

In principle, (as regards British owners of Spanish properties who are not actually resident in Spain), the Spanish Tax Authority will no longer be obliged to comply with the EU principles which require equal treatment of EU citizens.

It remains to be seen exactly how the negotiation between the UK and Spain will be concluded as regards fiscal issues. But, it is considered probable that once the UK is outside the EU, (non-Spanish Resident) British owners of Spanish properties will lose this special EU benefit, and will again be subject to the much more onerous 'national' Spanish Succession Tax rules, as applied by the Central Spanish Tax Office.

This would strip from British (but non-Spanish Resident) owners of Spanish properties, the more ‘generous’ succession tax allowances/ exemptions which the autonomous communities within Spain otherwise currently offer. So, a meagre succession tax-free inheritance amount of just below 16,000 Euros per spouse/ descendent beneficiary is then allowed. Any inheritance received above that value is taxable.

Conclusion

Well advised British owners of Spanish properties (but who are not actually resident in Spain) should therefore review their Spanish Wills and Estate Planning arrangements, to be prepared for this anticipated consequence of Brexit.

The tax mitigation steps which are recommended to prepare for this anticipated consequence of Brexit, are in fact, intelligent estate planning steps to take, even if the outcome of Brexit in this context is less onerous than expected.

So, in other words, a Spanish Wills and Spanish Estate Planning review is recommended as a wise process to go through in the run-up to Brexit- whatever the outcome of negotiations between the UK/ the EU. It is quite possible that the Spanish tax exposure can be reduced- whatever the end result of Brexit.

This general commentary is not intended to be exhaustive; and case-specific legal advice should always be sought.

The Legal 4 Spain team provides a full Wills, Estate Planning and Probate service for properties and other assets anywhere in Spain. We are always happy to provide a competitive cost estimate in the first instance, on a no-obligation basis.



Spanish Succession Tax Update

Spanish Succession TaxPosted by Andrew Thu, February 02, 2017 15:41:44

April 18th, 2016

Introduction

A frequently asked question by new clients prior to making Wills of their assets in Spain, is: ‘How much Succession Tax is payable in Spain?’

A simple enough question; and in the case of UK estates, for example- in the majority of cases- there is a simple enough answer. By contrast in Spain, there are a significant number of potential variables in the
calculation, such that the position is generally very much case- specific. It can therefore be misleading to provide generic advice/ calculations. (But an experienced practitioner will be able quickly to assess- based on the relevant details- and provide an indicative amount or percentage).

In this article, I will briefly review the usual variable factors, to identify the details which are usually required from clients. Then I will examine in more detail, a specific recent legal development as regards the actual location of real estate interests within Spain.

Variable Factors in Spanish Succession Tax (SST) Assessment

The principal factors which will determine the amount of SST which will be payable in a given case include: categories of assets; open market value of assets; actualised rateable value of real estate assets; official value of other assets (eg. vehicles); residential status of deceased; residential status of beneficiaries; number of beneficiaries; relationship/ connection between the deceased and each beneficiary; total deceased estate value; and pre-existing owned asset value by each beneficiary in Spain. The other determining factor for SST calculations which requires particular explanation, given that there have been recent legal changes, is the location within Spain of the real estate assets in a deceased estate.

Effect of Real Estate Location on SST Assessment

Traditionally (for SST calculation purposes), a distinction was made between Spanish property owners who were actually fiscally resident in Spain; and Spanish property owners who were fiscally resident outside Spain (for example, UK families with a holiday home in Spain, for occasional use). Spanish residents had the benefit of the SST exemptions/ allowances of the Autonomous Community (there are 17 in Spain) within which the property was situated for the purposes of calculating SST.

In contrast, non-Spanish residents were allowed no such regional reductions in SST, and were subject to the basic ‘national’ rules. So, even for spouses and descendants, each beneficiary had an SST- free allowance of just 15,957 Euros; and everything beyond that value level was subject to SST in the hands of each individual beneficiary.

A challenge was made against this practice through the EU Courts, on the basis that it created discrimination between European citizens, dependent upon whether they were fiscally resident in Spain or not. This was held to be contrary to the principles of freedom of movement of European citizens/ their capital within Europe.

As such, Spain having duly complied with the EU Ruling, no longer differentiates in SST calculations for European nationals with properties in Spain, between those who are fiscally resident in Spain and those who are not.

So, for UK nationals with properties in Spain, (for as long as the UK remains an EU member), the actual location in Spain of the property in question is of fundamental importance in determining the SST liability. The actual impact of SST varies dramatically between the individual Autonomous Communities within Spain, according to the applicable Autonomous Community’s own allowances and deductions for SST calculations. (As a side issue, many commentators believe that the imposition by different Autonomous Communities of different SST rules also creates discrimination between EU citizens depending on where in Spain their property is situated. No Ruling or Directive has yet been issued against Spain on this front. However, some see it as almost inevitable that eventually Spain will be forced to centralise/ standardise the SST policy across all the Autonomous Communities, to bring an end to this anomalous situation).

But pending any further change, it is important to note the actual location of a Spanish property continues to have a significant impact on SST liability.

Unilateral Relief Treaty

Another issue for UK estate planners to bear in mind in advising clients with Spanish assets, is the availability of Unilateral Relief Treaty credit for the purposes of UK IHT calculation, based on SST actually paid. This enables a final net overall UK IHT/ SST calculation to be made. There are a significant number of rules/ restrictions to bear in mind in this regard- also that the current Treaties are based on the UK’s current status within the EU. Should that change, then it is assumed that the position would need to be revisited; and this could, of course, have an important impact on overall tax rates in the context of inheritance of Spanish assets owned by UK nationals.

The Legal 4 Spain team is always available to provide preliminary advice on a no- obligation basis, in relation to Wills of Spanish assets and Spanish estate planning generally.



Reclaiming Wrongfully Charged Spanish Succession Tax

Spanish Succession TaxPosted by Andrew Thu, February 02, 2017 15:29:12

November 2nd, 2014

Introduction

As covered previously, the European Court of Justice has ruled that Spain’s practice of charging non-Spanish resident beneficiaries Spanish Succession Tax (SST) at a different rate from Spanish residents is discriminatory; and therefore unlawful.

Entitlement to demand a repayment of previously paid SST

Thus far, there are no exhaustive guidelines. But in principle, where a non- Spanish resident has accepted an inheritance of Spanish assets and has paid SST during the last 4 years at a rate which is higher than they would have paid had they been Spanish resident, then they are entitled to demand a repayment of the difference between the non-resident rate and the resident rate.

For these past ‘discriminatory’ cases, it remains to be seen whether a specific, official process will be established in Spain, to enable repayments of previously paid SST to be reclaimed.

In the absence of a clear administrative process in Spain for demanding a repayment in these circumstances, an individual legal action needs to be mounted by each beneficiary who considers that they have overpaid SST and are therefore entitled to demand a repayment.

And the legal right in these cases to demand a repayment is time critical, so the right could be lost unless prompt action is taken.

Issues with the legal process for reclaiming SST

The assessment of eligibility for making a claim can be a fairly complex and time consuming exercise. In particular, there have been changes in the way several of the Spanish autonomous communities have charged SST over the last few years (mainly reducing allowances for residents). This means that in a surprising number of non-resident beneficiary cases, despite significant SST charges, no discrimination can be shown.

Pending official guidelines, it is considered to be essential that cases must be fully prepared and demands submitted within 4 years of the date of the original tax payment, otherwise the legal right to demand a repayment could be lost.

It should also be noted that the reclaim would only be in relation to SST, not in relation to other Spanish probate costs and taxes (eg. Plus Valia tax).

It is considered unlikely that the Spanish Tax Authority will establish a rapid, simple and economical system for processing applications for repayment. There will inevitably be detailed documentation requirements; and certification of a receiving bank account will be required.

The reclaim process is therefore likely to be fairly lengthy. The consensus is that the period from commencing the case to reaching a conclusion is likely to be typically in the region of 3 years.

The process of demanding a repayment is also likely to be fairly costly. Preliminary estimates are that, to assess/ initiate the process will be likely to involve a cost of a minimum of 250 Euros per claim. And then the total cost of the reclaim process could be in the region of up to 20-30% of the amount reclaimed in total. (Although some interest may be recoverable, partly to offset the costs).

If a credit for the SST paid has been obtained in the beneficiaries’ own country (for example, against UK IHT), then this could undermine the Spanish case for demanding a repayment.

From initial discussions with specialist practitioners in this area, the range of minimum cases (below which they would not consider it worthwhile taking a case on) is between 1,500 Euros- 2,500 Euros SST paid (per beneficiary).

Of course, any entitled beneficiary can pursue their own claim for any amount of SST which is reclaimable- with or without professional representation. There is no minimum level. But independent professional advice is always recommended, to ensure the case is worthwhile pursuing; and is handled correctly.

Spanish legal proceedings generally can be lengthy and complex; and therefore costly. So it is essential at the outset of any Spanish legal case, to have a clear understanding of the costs which will be incurred; and the chances of success, to avoid the risk of ‘throwing good money after bad’.

Conclusion

For Spanish probate cases currently in progress, the obligation remains for beneficiaries to pay SST according to the current Spanish law (even though not EU compliant); and then (maybe) subsequently have the right to make a reclaim.

From the Spanish property owner or beneficiary’s point of view, this situation is far from satisfactory. But the EU Court Ruling has unavoidably created a ‘legal limbo’; pending fresh fiscal legislation/ directions from Spain.

Many practitioners have concluded that the SST reclaim process is likely to be so fraught with potential issues- delays, costs, procedural uncertainty, that the number of individuals who will pursue cases- and see them through to a successful conclusion- will be relatively small.

It is anticipated also that some beneficiaries will conclude that, irrespective of the potential legal entitlement, they have drawn a line under completed Spanish probate cases; and have little interest in reopening the cases; and/ or taking on the cost and stress of embarking upon this Spanish legal process.

But, for those individuals who do wish to pursue an SST reclaim, it is recommended to be in the hands of a specialist professional, as any procedural errors could be fatal to the claim. Another risk inherent in reclaim opportunities of this nature is that non-specialist operators tend to ‘spring up’, even taking on claim cases with no real merit, but charging hefty up-front fees. As with all professional services providers, some investigation as to background, reputation and professional regulation/ indemnity cover is essential.

This general commentary is not intended to be exhaustive; and case-specific legal advice should always be sought.



Spanish Succession Tax Under Review Following European Court Ruling

Spanish Succession TaxPosted by Andrew Thu, February 02, 2017 15:27:50

September 29th, 2014

Overview

The European Court of Justice has ruled that the Spanish Tax Authority’s succession tax system conflicts with the European Union principles of freedom of movement of EU individuals and circulation of money within the EU.

Spain must comply with this EU Court Ruling by making changes to its succession tax system, to become EU compliant within 6 months. Otherwise, Spain will face financial penalties.

As yet, there has been no formal response from the Spanish Tax Authority as to its proposals to comply with the EU Court Ruling.

Background

Spanish Succession Tax is not administered centrally; or charged in a uniform way nationally; or at a single rate; or subject to universal national allowances and reductions.

In many countries, the calculation and charging of succession taxation is simplicity itself. However in Spain, it is a highly complex system, which creates a great deal of uncertainty, inconsistency and controversy.

At the heart of the complexity is the fact that for Spanish residents, the responsibility for succession tax administration lies with the 17 individual autonomous communities. Each autonomous community has discretion as to charging basis; practice; and allowances/ exemptions.

This fiscal quagmire alone creates bewildering inconsistencies across Spain.

But the further peculiarity, (central to the EU Court Ruling), is that for non-Spanish residents, succession tax is administered by the Central Spanish Tax Office, which strips from non-Spanish residents, the more ‘generous’ succession tax allowances/ exemptions which the autonomous communities otherwise offer. So, for non- residents, a meagre succession tax-free inheritance amount of just below 16,000 Euros per spouse/ descendent beneficiary is allowed. Any inheritance received above that value is taxable.

And as a side issue of great consternation, it has been acknowledged that many Spanish families living in Spain also suffer discrimination under the current system, according to where (in Spain) their family members live.

So the current system not only unlawfully discriminates against non- Spanish owners of Spanish properties. For Spanish families also, its haphazardness can be financially ruinous.

The ball is now in Spain’s court, to see how they will react, in order to bring Spanish Succession Tax into line with the EU requirements.

It remains to be seen whether this will be by centralizing/ standardising administration or (if that is deemed too radical), at least a harmonisation of practice across Spain; and/ or a switch of criteria from individual place of residency to asset location.

Commentary

• A period of just six months is very tight indeed for Spain to implement a complete overhaul of- and radical change to- its succession tax system.
• With Spanish elections on the horizon, it is perhaps unlikely the current Spanish Government will progress matters with great dynamism. Any change will benefit some, but disadvantage others. Succession tax can be an emotive issue for voters.
• If the six month deadline is not met, then Spain will face EU financial penalties; but meanwhile, continue to administer succession tax on the current basis.
• Pending fresh Spanish legislation/ directives, any individual wishing to challenge a Spanish Succession Tax charge or to reclaim previously paid tax, will presumably need to bring their own legal case, citing the EU Court Ruling.
• If (to comply with the EU Court Ruling) Spain reduces the succession tax impact on non-residents, to be equal to the current impact on residents, then not only would that add fuel to the fire for a potentially massive number of reclaimants, but this would guarantee a reduced future fiscal income; therefore being hugely expensive for Spain.
• Conversely, if Spain were to increase the succession tax impact on residents, to be equal to the current impact on non-residents, then the issue of demands for refunds could be conveniently complicated. And overall, this would significantly benefit Spain by increasing future succession tax revenue.
• So, a feasible strategy for Spain could be: to leave matters as they are for now; and just pay any EU fine for interim non-compliance. Then, after the elections, introduce new national regulations to standardize succession tax, with the emphasis on asset location rather than individual residency. And in so doing, phase out resident reductions, to equalize the impact of succession tax across the board.
• Perhaps a cynical posture, to react to the EU Court Ruling by increasing succession tax impact. But with the stark choice between potentially facing a huge fiscal loss; and increasing fiscal revenue, it would be surprising for Spain to choose the former option.
• Ultimately therefore, the EU Court Ruling could mark a turning point, from which the overall impact of succession taxation in Spain, (although standardized in some form, to satisfy EU requirements), actually increases- in particular for Spanish residents.
• In terms of reclaims for previously paid tax, even if a clear reclaim route is established, if the reclaimants had received credits against fiscal liability in their own countries (e.g. pursuant to double taxation relief treaties), it is assumed that any Spanish reclaim application would be denied.
• It is also likely that if a clear reclaim route is established, the process itself would be complex, lengthy and therefore expensive to pursue. It is unlikely that the Spanish Authorities would be inclined to make it a rapid, simple and economical process.

Conclusion

As regards Spanish inheritance cases currently in progress, the current Spanish legal/ fiscal obligation continues, pending fresh Spanish legislation/ fiscal directions. So, inheritors of Spanish assets are legally obliged to continue to pay succession tax on the basis of the current system- even though it has been determined by the European Court of Justice to be operating contrary to EU rules!

An uncomfortable position for inheritors in the meantime. And furthermore, if they fail to make tax payments when due, they may face interest/ penalties on late tax payments. But then having paid tax sums due, although there are certainty changes anticipated to the Spanish succession tax system, the exact nature and timing of the changes is uncertain. And finally, if any reclaim option does arise, it is likely to be lengthy, complex and expensive to pursue.

We will report further as soon as a decision on the way forward for Spanish Succession Tax is announced.

This general commentary is not intended to be exhaustive; and case-specific legal advice should always be sought.

The Legal 4 Spain team provides a full probate service for properties and other assets anywhere in Spain. We are always happy to provide a competitive cost estimate in the first instance, on a no-obligation basis.



Warning of 80% tax charge on Spanish inheritance

Spanish Succession TaxPosted by Andrew Thu, February 02, 2017 15:18:49

April 11th, 2014

Spanish tax law can undoubtedly lead to very unfortunate fiscal consequences in the event of inheritance by beneficiaries who are unrelated to the deceased- including unmarried / same sex partners, particularly if the relationship is not ‘recognised’ with civil status.

So, the bad news is that advisers who warn of the exposure to Spanish Succession Tax rate of 80% (or even slightly more) are confirming what could theoretically happen.

However, it should be stressed that such a high rate of taxation would only apply in the very worst Spanish tax case scenario. For example, with a very high value Spanish estate; already wealthy beneficiaries; and no family or marriage connection between the deceased and the beneficiaries.

But in any event, even with Spanish estates of more modest value, the impact of Spanish Succession Tax can still be unexpectedly harsh. So, it’s clear that planning is essential in all family situations involving Spanish property ownership, to prevent the risk of legally avoidable Spanish tax liability arising.

Advising non-Spanish owners of Spanish properties is complex and specialised area of Spanish legal practice, and without the correct advice, major Spanish tax problems can easily arise.

We are happy to talk through any potential cases (without obligation). Together we can explore the solutions that are available to achieve succession wishes, in a tax efficient manner.



Can Spanish Succession Tax be reduced by having a Spanish Will?

Spanish Succession TaxPosted by Andrew Thu, February 02, 2017 15:15:58

January 27th, 2014

In many cases, the answer is: yes!

It is often possible to deal with Spanish estate planning and structuring so as to reduce the impact of Spanish Succession Tax within the Spanish Will.

If you have a Spanish Will, this can assist in reducing Spanish Succession Tax in the following ways:

1. It ensures that you have the flexibility you are legally allowed to select your beneficiaries; so that the most tax advantageous succession route in the circumstances can be identified and provided for.

2. It secures the best legal basis for a fast and economical succession process, following a death. This helps to ensure that the legal process can be completed within the very tight timescales allowed under Spanish tax law. Conversely, any failure to comply with the statutory timetable (for example, delays caused by not leaving an up to date and valid Spanish Will) can expose beneficiaries to increased tax liability, through the imposition of interest and penalties on the tax debt.

It is perfectly legal and acceptable to organise your estate succession in Spain, so as to minimise the exposure to Spanish Succession Tax- as far as legitimately possible in the circumstances. In advising our clients, we consider all available routes to achieve this. As our team is independent and not tied to any single process or structure; we are able to provide objective and case- specific advice in each individual client scenario. This ensures the most cost effective estate planning solution within the constraints of each case.



European Inheritance Law Changes- Avoiding Spanish Inheritance Problems

Spanish Succession TaxPosted by Andrew Thu, February 02, 2017 14:23:37

September 16th, 2013

New European rules will come into force on 17 August 2015, which affect the inheritance of Spanish assets of non-Spanish individuals who die after that date.

These changes will benefit the families of owners of Spanish properties who leave up to date, professionally prepared and correctly worded Spanish Wills.

However, those who leave no Spanish Will; or Spanish Wills which are out of date or do not take into account the new Regulations, could leave significant problems and unintended consequences for their families or chosen beneficiaries.

There are numerous benefits of the new Regulations for non-Spanish owners of Spanish properties (provided that their Last Wishes are validly expressed in the correct form of Spanish Will). These benefits include:

• Non-Spanish nationals with properties in Spain are officially entitled to exclude the restrictive Spanish ‘forced heirship’ succession law from applying to their families.
• Through Spanish Wills, significant opportunities are now allowed securely to mitigate Spanish Succession Tax.
• Flexibility as to succession route is permitted in carefully drafted Spanish Wills, to enable beneficiaries to elect the applicable succession route following a death. This means the route which best suits family circumstances and tax efficiency at the time, can be applied. This principle sits comfortably with English nationals, who are allowed under English law to make certain variations to deceased’s Wills, following their death.
• Confusion as to what constitutes ‘habitual residence’ (becoming the main criteria for choice of law in Spanish inheritance) can be avoided. Certainty and security in succession now prevails in Spanish estate planning.

Although these developments are extremely positive for Spanish property owners (and those considering investing in Spanish property); it must be emphasized that those who fail to obtain up to date professional Spanish estate planning advice could fail to secure the benefits of the new Regulations for their families or chosen beneficiaries.



Is non- resident Spanish Succession Tax illegal?

Spanish Succession TaxPosted by Andrew Thu, February 02, 2017 14:17:45

April 8th, 2013

The issue in contention, which many families with Spanish properties are very concerned about is that the amount of Spanish Succession Tax payable by non- Spanish resident beneficiaries can differ substantially from the amount payable by Spanish resident beneficiaries.

Where the individuals concerned are European Union Citizens, there should not (according to European Law) be discriminatory treatment on the grounds of residency/ non- residency.

A firm ruling is awaited from the European Commission, but pending that, the anomaly remains that (whether or not they are EU Citizens), non- Spanish resident inheritance cases are in practice generally subject to significantly more onerous Spanish Succession Tax treatment.

We are monitoring the situation and will advise our clients and contacts as and when there are further developments in this regard.