Hello,
More and more people are investing in Spanish property. Individuals are attracted by a number of reasons including the thought of retiring in an agreeable climate and taking advantage of Spain?s booming holiday and golf industries.

Historically, the wise investor has purchased Spanish property through an offshore company to minimize their tax liabilities. However, now this loophole has been closed, it is vital the property purchaser is aware of the potential tax liabilities

Taxes on some income and on capital gains may be avoided in Spain by careful planning, but tax liabilities on wealth such as inheritance tax (IHT) are more difficult to leave behind.

The rules governing Spanish Inheritance Tax and Gift Tax are currently set out in Law 29/1987 of 18 December and in Royal Decree 1629/1991 of 8 November on the Impuesto Sobre Sucesiones y Donaciones (ISD).

ISD is the Spanish equivalent of the UK`s Inheritance Tax and death tax in other jurisdictions. In contrast to the UK and US systems, ISD does not tax the estate of the deceased, but taxes the real value of the portion received by each heir or legate. Transfers between spouses, which virtually always occur when one spouse dies, are not exempt from inheritance tax in Spain.

ISD is levied on the net market value of each heir?s portion (gross assets less liabilities), by applying progressive tax rates ranging from a start base of 7.65% through to a top rate of 34%. Once the standard tax has been calculated, the law provides for a surcharge based on two different factors, (a) the heir?s relationship to the deceased and (b) the heir?s pre-existing wealth. The surcharge applied increases the more distant the relationship to the deceased is, and as the wealth of the heir or legatee increases. Unrelated wealthy heirs have been known to pay a rate of ISD in excess of 80%.

In the case of the deceased being a resident in Spain for tax purposes, all the assets transferred to an heir or legatee, wherever the assets are situated in the world, will be subject to the ISD tax.

In the case of non-residents of Spain, then only those assets situated in Spain, or the rights capable of being exercised or enforced in Spain, will be subject to the tax. For non-residents these assets could include Spanish property (holiday villa or apartment), funds in Spanish bank accounts (opened for the purpose of paying local taxes and other charges and outgoings in respect of a holiday home), and cars registered in Spain. For most non-residents the greatest value asset would be the Spanish property.

The ISD tax assessed is payable within six months of death, and the ISD payable is the liability of the heir(s) or legatee(s), and cannot be taken from the deceased?s estate.

Therefore, where a Spanish property is inherited (even between spouses), the property itself cannot be used as collateral security to provide a loan to pay the ISD, nor can it is sold until the ISD tax has been paid. Should the ISD tax remain unpaid after a period of six months, then additional interest and fees also become payable?
Thanks in advance

Hello saul,
Some questions.
1. Presumably, creating an offshore charge is only something that can be used by non-residents?
2. If, as in the example, the people involved are non-resident in Spain, they will usually (but not necessarily) be resident somewhere else. If we assume that to be the UK, what will be the additional UK inheritance tax to be paid in each stage of the scenario?
3. Can 2. Be mitigated by taking residency in a more amenable location with less onerous inheritance taxation? And what is the likelihood that international "tax harmonization" initiatives led by UK and other governments will persuade these regimes to change in favour of governments?
4. What options for inheritance tax mitigation are open to Spanish residents?
5. Obviously the tax savings to be made against the Spanish system far outweigh any likely costs of setting up such a scheme, where the property is of significant value, but is this still the case when UK tax, for example, is included in the costs.
6. Is it possible to take out life insurance against the estate owner, such that, on their death, the payout can be used to pay off the inheritance tax liabilities incurred by the inheritors? Is it possible to keep the payout outside the estate of the deceased such that it can be used?
See you soon