Inheritance Tax (ISD) in Spain

Share | Print

Inheritance Tax (ISD) in Spain

There are two main features of inheritance tax (ISD) in Spain:

1. The taxable person is the recipient: ISD is a tax on acquisitions, not on transfers. In the UK (for example) in regards to equivalent inheritance tax (IHT), it is the estate of the deceased which is subject to tax. In Spain, the recipient of the lifetime gift or inheritance is the taxpayer.
2. Spouses are not exempt from Spanish inheritance tax: Spouses are treated no differently than adult children. In the IHT example, a spouse is generally an exempt beneficiary.

People Obligated to Pay ISD 

• An individual resident in Spain is liable for ISD on worldwide assets.
• An individual not resident in Spain is liable on assets held in Spain.

Nationality has no bearing at all and the only two questions asked are: 

1. Where is the heir resident? 
2. Where are the assets sited?

For example, in the situation of a married couple who jointly own a property in Spain (whether or not they are resident there), on the death on one spouse, the survivor will be liable for ISD on the deceased spouse's half (assuming the wills have been written that way).

Working Out the Tax to be Paid

The calculation of the tax due is done in five stages:

1. Valuation of the asset: While all sorts of valuation bases may be used in Spain, the basis required for ISD is known as "real value". In reality, this means that the starting point is a full, open-market valuation. If there is a mortgage on the property (which is registered in the Spanish land registry) the appropriate portion of that may be deducted from the market value.
2. The taxable person is the recipient, the relationship between the taxpayer and the person making the gift or leaving the inheritance must be identified and that relationship falls into a specific group:
   • Group I: natural and adopted children, grandchildren in direct line of the descent who are under the age of 21
   • Group II: the same descendants listed above in Group 1 but aged 21 and over, ascendants in direct line, and spouses
     Note: Spouses are not favoured beneficiaries and are not treated differently than adult children, parents and grandparents
   • Group III: consists of those in the next degrees of kinship out to first cousins
   • Group IV: consists of the rest of the family (collateral fourth grade and beyond) and unrelated persons. This category of unrelated persons includes unadopted stepchildren, and the so-called common-law spouse. 
3. Work out the personal allowance available (this is per recipient). Note that no allowance is available on lifetime gifts - only on inheritances.
4. Deduct any personal allowance available from the value arrived at in stage 1 above, calculate the "raw" tax figure which are set on bands according to the amount .
5. Apply the relevant co-efficient. This takes into account the degree of kinship and the taxpayer's pre-existing net wealth (for non-residents, pre-existing net wealth is calculated with reference to wealth held in Spain only.

Summary 

• Value the asset received
• Deduct any allowable deductions or relief
• Determine the degree of kinship between donor and donee (the taxpayer)
• Establish into which kinship Group the taxpayer falls
• Deduct any available personal allowance
• Tax the resultant figure through the bands
• Calculate the taxpayer's pre-existing net wealth
• Determine which co-efficient is applicable
• Apply the co-efficient to the tax figure obtained earlier

When Payment Should be Made

It is the taxpayer's duty to present all the documents reporting the taxable transaction necessary for the calculation of the tax due. A taxpayer may opt to calculate the tax due and present the declaration together with the payment. This must be done as follows:

1. The liability to tax arises:
   • Death
   • Lifetime gifts (this is the date on which the gift is made)
2. Declarations must be made on:
   • Death; within six months of the date of death of the transferor
   • All other cases: within 30 calendar days of the day following the conveyance of the gift

Deferring Payment

It is possible to defer payment, but mostly only in the case of inheritances. To defer payment the taxpayer must demonstrate that they have insufficient liquidity to meet the tax in cash. If deferment is granted, interest is charged at the official rate and added to the tax bill.

There are some limited circumstances where deferred payment is possible on lifetime gifts, however this is limited to interests in a family or professional business.

The four-year window

The tax administration is prohibited from seeking payment, or applying sanctions for non-payment of tax once a period of four years has passed counting from:  

1. the date for final presentation by the taxpayer of all the required documents, or 
2. the date of any tax offence

This four-year (formerly five year) proscription period is a general one in Spanish tax law. There are various opportunities for the tax authorities to "stop the clock" and keep the case within the four year window.

Notifying tax authorities

Most institutions - such as banks and insurance companies, Spanish authorities and other people likely to be involved in a transfer of value (notaries and registrars) - are obliged to make reports to the tax authority. This duty is reinforced by making them "subsidiarily liable" for payment of the tax.

Related Information

• Comprehensive information on Inheritance Law in Spain from !Abogado.com: Click here
• Comprehensive information on Spanish Inheritance and Gift Tax, along with tax tables from !Abogado.com: Click here 
• See the AngloINFO INFOrmation Page, Making a Spanish Will
• See the AngloINFO INFOrmation Page, Wills & Probate for UK Citizens in Spain

Information provided by John Siddall Financial Services Limited
Siddalls Spain - Tel: 0034 663 845 549 / www.siddalls.net
Copyright © 2008 John Siddall Financial Services Limited All Rights Reserved