Spanish Inheritance Tax Planning
Owners of properties in Spain hoping to pass on their assets after death need to take prior action or you could be leaving your benefactors with a huge financial headache.
What is not often understood is that Heirs are liable to pay inheritance tax in two jurisdictions, Spain and their country of domicile. A critical difference with the UK is that in Spain it is the actual Beneficiary rather than the estate, who is taxed. This means when the owners die the property cannot be sold to pay the Spanish inheritance tax and is possibly frozen along with any personal cash in a Spanish Bank until the Heirs pay the IHT Taxes in Spain.
As well as the Spanish Inheritance Tax having to be paid by the Beneficiaries of the property, over a certain threshold value UK Inheritance must be paid too. When you factor in the costs of probate in both countries the value of the estate can be reduced by an average of 60%.
Another crucial difference between the UK and Spain is that in Spain the Husband or Wife of the deceased may not be exempt from Spanish inheritance tax.
There is one perfectly legal and simple solution to avoid these Taxes which is to purchase or move the property ownership through to a UK Private Limited Company. This should not be confused with holding the Company through an offshore based Company for which there are a number of issues and is something which is not recommend as they are not part of the EU. The main advantages are summarised below:
- By placing the property in a UK Limited Company shares in that UK company can be dealt with by a simple UK Will and for the vast majority of Company structures there will be NO Inheritance Tax to pay after the death of the Shareholder in that Company. The shares simply pass to the nominated Beneficiaries who can be of any Nationality and during this process Spanish Inheritance Tax is completely removed.
- Other than this you will maintain full control of the property at all times, all that is different is that a UK limited Company owns the property in Spain and you are the owner of that Company.
- You can rent the property, raise funds on it and if you decide to sell the Company there will be NO 7% transfer taxes for the purchaser to pay and reduced capital gains tax for the seller.
- Another advantage of this Company structure is that all attributable expenses such as mortgage interest, rate bills, water, electricity and repairs can be Tax deductible by the Company; this can also include car hire and flights for the Directors. You are not allowed to offset expenses in Spain if the property is owned in your own names.
(If a purchaser wishes to acquire a property from a seller into a UK Limited company the purchaser can form a UK Limited company using this scheme, with the seller as the Shareholder of the company, the seller can attend the Notary and instead of selling the property to the company he can Gift the property to the company. In this instance there would be no 7% Transfer Tax to the purchaser and no 3% retention to the seller. There is a simple Sale of Shares to complete the deal)
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