How Modelo 720 affects inheritance tax
This is a change in working practice and enforcement of existing law rather than a change in the law.
Since December 2012, there has been a requirement on Spanish tax residents to declare all overseas assets to the hacienda (the Spanish tax office), if the value of those assets exceeds €50,000. In addition any change in the value of overseas assets by €20,000 or more must be declared annually.
The effect of this is that whereas pre Modelo 720, non-Spanish assets received by a Spanish tax resident as part of an inheritance were largely ignored by the hacienda now they have to be declared as part of the inheritance and taxed accordingly.
There has always been an obligation to declare to the hacienda and pay tax on any inheritance received by a Spanish tax resident regardless of from whom and from where the legacy came from. Spanish inheritance tax is paid by the recipient not the estate. So a legacy from a great Aunt who had never been to Spain in her life would be liable to Spanish inheritance tax if received by a tax resident of Spain. This also applies to non-Spanish assets received as part of an inheritance which includes Spanish assets. The most common example is where the spouse receives all the assets of the deceased spouse in and out of Spain.
Previously the common practice was not to include non-Spanish assets in any inheritance declaration for inheritances which included assets in and out of Spain. The Spanish tax office showed little interest in collecting inheritance tax on non-Spanish assets even though there was a statutory obligation to pay it.
Since Modelo 720, this has changed. The recipient now has to declare the assets in the Modelo 720 and state how they came into possession. This in turn will lead to a tax demand (and possibly a fine) from the hacienda if the receipt of the inheritance is not already declared.
One solution to avoid this problem and additional tax burden is to restructure the wills so that non-Spanish residents are the recipients of non-Spanish assets. This could be for example the children of the testators or even a discretionary trust containing the surviving spouse and other people (who are non-Spanish tax residents) as potential beneficiaries.
Jon Sutton is a specialist Solicitor dealing with inheritance both in Spain and in the UK. He can obtain Grants of Probate and deal with intestate succession in both countries. To book an appointment call 00 34 951315161 or email email@example.com.