Inheritance tax in Spain

In Which Cases is Spanish Inheritance Tax Due?

This tax is levied on property acquired upon its owner’s death when the individual assets are transferred between two natural persons. Legal entities, such as corporate entities or foundations, are not subject to Spanish inheritance tax yet may be subject to corporation tax or non-resident tax.

What Regional Differences Need to be Taken into Account?

In Spain, inheritance tax is generally levied nationwide. Exceptions apply to the Basque Country and Navarre, which have their own inheritance tax laws. Such autonomous regions of Spain as the Balearic Islands and the Canary Islands will also apply their own inheritance tax regulations with regard to tax allowances. These regional differences will need to be borne in mind should either the testator or the beneficiary be domiciled in any of these regions.

Who is Affected by Spanish Inheritance Tax?

In tax law, a distinction is generally made between unlimited and limited tax liability. In Spain unlimited tax liability will apply for an heir whose habitual residence was in Spain at the time of their property acquisition regardless of where in the world this property was located. In this case, only the place of residence of the heir, and not of the testator, is relevant. Limited tax liability applies if the beneficiary’s habitual residence was not in Spain at the time of acquisition. In this case, only the assets that are located in Spain or can be used there are subject to Spanish inheritance tax. Among these assets there may be real estate as well as movable property, such as vehicles or works of art that are in Spain.

How is Tax Liability Calculated?

Before the tax liability can be calculated, the taxable acquisition must first be determined. That involves identifying all the entitlements and liabilities that the deceased leaves behind and that are transferred to the heir. The market value of the acquired assets at the time of inheritance is decisive for purposes of taxation. Any encumbrances or debts can be deducted from the tax liability with the exception of the costs associated with settling the estate.

How High is Inheritance Tax in Spain?

Spanish tax rates range from 7.65%, rising progressively to 34%, depending on the total value of the inheritance.

How High are the Inheritance Tax Allowances?

Tax-free amounts are also graduated depending on the degree of kinship in relation to the deceased. There are four basic groups, whereas Group 4 is not entitled to any allowances.

• Tax Group 1: children, adopted children, and grandchildren under 21 years of age (€15,956.87 up to a maximum of €47,858.59 depending on age)
• Tax Group 2: children, adopted children, and grandchildren over 21 years of age, spouses, parents, grandparents (€15,956.87)
• Tax Group 3: second- or third-degree relatives (€7,993.46)
• Tax Group 4: persons with no familial relationship to the donor

Are Tax Allowances Higher in the Event that the Deceased Lived in the Inherited Property Themselves?

Yes, if the deceased used the property as their main residence, it is exempt from inheritance tax for the heir up to 95% and up to a maximum amount of €150,253.03. The heir must, however, belong to tax group I or II, and the inherited property may not be sold within the next 10 years.

What Other Taxes Should Beneficiaries be Prepared to Pay on Real Estate?

In addition to inheritance tax, the heir must also pay municipal capital gains tax. As the name suggests, Spanish municipalities have the right to impose a tax on urban properties if those have gained in value. An increase in value must have occurred between the time the donor acquired the property and the time it is transferred to the beneficiary. Municipalities are largely free to set their own rates. The value increase will be determined to lie between 2.7% to 3.7%. Depending on the size of the respective municipality, it can then levy a tax ranging between 16% and 30% on this increase.

Can German Inheritance Tax Also be Incurred on Property Inherited in Spain?

If either the testator or the heir reside in Germany, German inheritance tax will generally also be due. It is possible to avoid double taxation in whole or in part by offsetting the Spanish inheritance tax against the German inheritance tax. In Germany tax credit is only granted in the case of unlimited gift tax liability according to German law.

How Shall Inheritance Tax be Declared and What Deadlines Need to be Observed?

In Spain inheritance tax is declared by means of a self-assessment procedure. The heir must calculate the tax themselves and declare it within six months of the testator’s death. A deadline extension up to twelve months is possible and is recommended so as to avoid penalties.

When does Spanish Inheritance Tax Become Time-Barred?

The limitation period for Spanish inheritance tax generally lapses after four years, starting with the end of the period for voluntary payment.

CPA Nyikolaj Szmolenkov M.A.