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Spain- Succession Tax and Inheritance Planning Update

Spanish Succession TaxPosted by Anne Sun, May 13, 2018 22:24:54

Introduction
The major changes introduced in Andalusia at the beginning of 2018 for the calculation of Spanish Succession Tax (SST) liability are of note generally, when dealing with estate planning and inheritance cases which include Spanish assets.

Andalusia is only one of 17 Autonomous Regions within Spain

Whilst in Spain, the individual Autonomous Regions set their own exemptions/ allowances, a very significant proportion of Spanish properties owned by British nationals are actually situated within Andalusia. Hence, an awareness of the SST rules in Andalusia is particularly important for estate planning professionals who deal with cases including Spanish assets.

Movement towards reduced SST Impact

The recently introduced fiscal changes in Andalusia followed a concerted social and political campaign in Spain against the previous rules- which in many cases, led to inconsistent and onerous treatment of beneficiaries. Several other Autonomous Regions had previously capitulated to this type of pressure; and had taken steps to reduce SST Impact.

Now that Andalusia has similarly acted, it is anticipated that Autonomous Regions which (for now), continue with harsher SST rules, could over time, also introduce less stringent rules. In general terms, the policy trend in Spain certainly appears to be towards reducing SST impact.

Also, many commentators continue with the view that the imposition by Autonomous Regions of different SST rules also creates discrimination between EU citizens- depending on where in Spain their property is situated. The view being that it is inevitable eventually, that Spain will be forced to centralise/ standardise the SST policy across all the Autonomous Regions, to bring an end to this anomalous situation.

Andalusia's New SST Rules

The effect of the new rules is that spouses and parents/ children/ grandchildren who individually inherit assets within Andalusia which do not exceed 1 Million Euros in value, pay no SST- by way of an exemption. But as always, there are various important 'small print' points:

· The new rules only take effect in relation to inheritance which arises from deaths occurring after 1 January 2018. There is no retrospective effect.

· The new rules do not benefit beneficiaries who fall outside the strict marital and ascendency/ descendency relationship groups indicated.

· Any beneficiary who has wealth above 1 million Euros in value before the inheritance in question does not have the benefit of the new exemption.

· For cases where the actual amount inherited exceeds 1 million Euros in value, then it is only the amount above 1 million Euros which is taxed. (Previously this was not the case. To exceed the exempt amount even by one Euro meant that tax was then paid on everything- subject only to very small allowances).

Issues for British owners of Spanish Properties

· As was previously the case, EU individuals inheriting properties in Spain continue to have the benefit of the individual Autonomous Regions' SST exemptions and allowances, irrespective of their country of actual residency. This extends to the new rules of Andalusia, including the 1 Million Euro exemption.

· However, once Brexit occurs, (as British owners of Spanish properties will then no longer be EU individuals), it is anticipated that they will only have the benefit of the individual Autonomous Regions' SST exemptions and allowances provided that they are fiscally resident in Spain.

· So post-Brexit, family owners of Spanish properties who continue to live mainly in the UK (and, for example, just have a holiday home in Andalusia), will instead of having an SST exempt amount per beneficiary of 1 Million Euros, have an SST exempt amount per beneficiary of just under 16,000 Euros!

· In estate planning terms therefore, it is essential to bear in mind where potential beneficiaries are fiscally resident. In many cases of English individuals who have retired to Spain, for example, if their children remain living in the UK, then the family Spanish assets remain very much exposed to SST.

· For this reason, although the headline-grabbing increase in the SST exempt amount has come as a relief to many families, there are a very significant number of British families with properties in Spain where (and even more so, anticipating the post-Brexit situation), there is very little in the way of SST protection. So, intelligent estate planning; and having in place tax efficient Spanish Wills, remains as important as ever, for English families with properties in Spain.

The Legal 4 Spain team is always available to provide preliminary advice on a no-obligation basis in relation to Estate Planning and Inheritance cases where there are Spanish assets.



Why Spanish property owners need Spanish wills

Spanish Wills &Estate PlanningPosted by Anne Sun, October 15, 2017 13:01:49

For owners of Spanish properties, the importance of making a Spanish Will is paramount.

In general terms, a correctly executed Spanish Will ensures certainty, speed and economy in the event of Spanish probate; and also provides the facility for tax efficiency.

Conversely, the consequences for the beneficiaries of a non-Spanish national who dies leaving Spanish assets, but no Spanish Will, can be unexpectedly onerous. In our Spanish probate practice, to date, there is not a single case where we have not found a solution to complete Spanish probate- however unusual the circumstances.

In a few exceptional cases, whilst it has been possible to ‘unlock’ the Spanish property by completing the Spanish probate case, the combination of the failure of the deceased to make a Spanish Will and the consequential forced application of Spanish legal and fiscal principles, has inevitably created situations of significant complexity for those left behind. A couple of examples will illustrate the point.

Intestate Spanish resident

A deceased English lady, estranged from her three adult children from her first marriage, since her second marriage 25 years ago. She died totally intestate. She had taken Spanish residency along with her second husband, in her final years. She had verbally expressed her intention that her surviving husband (and co-owner of the Spanish property) should receive her 50% interest in the Spanish property in the event of her death.

As the deceased was habitually resident in Spain at the time of her death, in the absence of any legally binding direction for English succession law to apply (by her not having made a Spanish Will), Spanish succession law had to be applied.

Spanish succession law generally operates to protect the interests of descendants- therefore in this case, necessitating the long- estranged deceased’s children’s involvement in the Spanish probate process.

The deceased’s children (after no contact in 25 years), had to be traced through genealogy professionals. Rejecting the proposal simply to renounce their entitlement, as had been hoped, the deceased’s husband is left with a restricted interest in the Spanish property- now being a co-owner, along with his deceased spouse’s children- whom he had never even previously met.

Had the deceased signed a simple Spanish Will containing an expression of her wish for her husband to inherit- pursuant to English succession law, her husband would have enjoyed a comfortable retirement; and he would have been able to sell the Spanish property as he had planned with his late wife; enabling him to return to live in England. He would have received the Spanish property sale proceeds following his wife’s death.

Instead, he remains in Spain with all his wealth tied up in a Spanish property, which is now co-owned along with individuals who are not known to him; and whose willingness to co-operate is directly linked to ill-feeling over the demise of their parents’ marriage 25 years ago.

In fact, had it not been possible to find the solution we did, the situation would have been significantly worse for all concerned, with the property totally ‘locked’ in legal terms; and selling or dealing with (mortgaging/ letting) the property would have been totally impossible. Our solution of the case at least provides a framework for the family to come together and settle terms between them for the disposal of the property- which could then be effected without any further legal complications.

An English resident couple in a civil partnership with a property in Spain

Each had English Wills leaving their respective worldwide Estates to a common friend.

Each partner then intended as part of their overall Estate planning, to sign a Spanish Will leaving a life interest in their respective shares in the Spanish property to the surviving civil partner, with the underlying legal title in the Spanish property passing down to the common friend.

This intended Estate planning strategy would have resulted in a zero Spanish Succession Tax bill for the surviving partner; and his having a secure lifetime interest, guaranteed for his remaining years- living unencumbered in the Spanish property.

But the failure (by the partner who then died before signing his Spanish Will), to act promptly in signing the Spanish Will as planned, meant that the surviving partner was unable to claim the intended lifetime interest in the Spanish property.

And furthermore, because of a quirk in the regional rules for calculation of Spanish Succession Tax, this also led to a total Spanish Succession Tax bill of more than 3 times the amount it would otherwise have been (from 20,000 Euros up to more than 60,000 Euros).

So, again, the best possible solution in the circumstances was found for the case to ‘unlock’ the Spanish property. But the failure of the deceased to have put in place a Spanish Will with tax efficient Estate planning, unavoidably frustrated his testamentary wishes; and also left an unnecessarily high level of tax exposure.

The Legal 4 Spain team is always available to provide preliminary advice on a no-obligation basis in relation to Inheritance and Estate Planning cases where there are Spanish assets.



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.