Is inheritance tax in Spain about to change? By Jon Sutton, Specialist in Inheritance, Wills and Probate at De Cotta Law

Inheritance tax is an important consideration for anyone who owns property in Spain or is thinking of purchasing. The autonomous regions are allowed to set their own inheritance tax levels and allowances. However these allowances only apply for the estates of people who have been resident in that region for five years and the beneficiaries are similarly resident. If both the deceased and beneficiaries do not satisfy the residency requirement then the national state rules apply.

There is a vast difference between the state inheritance tax rules and the regional allowances. Several regions including Madrid, the Canary Islands, the Balearics, Valencia and Murcia have virtually no inheritance tax between spouses or between parents and children. Others, principally those with socialist administrations, have less generous allowances, nevertheless with professional advice the reductions can be utilised so as to significantly lower or eliminate the inheritance tax burden. For example Andalucia allows a gift to a spouse, child or parent of up to €175,000 tax free. This is an all or nothing allowance not a nil rate band so a gift of €176,000 would be taxable on the full amount.

As previously stated, these allowances only apply where the deceased and beneficiaries are residents. If not, the much less generous state rules apply which simply allow a deduction of just under €16,000 from the gift for tax purposes for spouse, children and parents of the deceased. This can mean that non resident beneficiaries pay many thousands of Euros more tax than they would if they were residents.

However help may be at hand for those thousands of non resident holiday home owners or residents of Spain whose principal or reserve beneficiaries (such as their children) are non residents.

On the 16th February this year, the European Commission asked Spain to amend its tax provisions on inheritance and gift tax on the basis that they impose a higher tax burden on non-residents and on assets held abroad. The Commission was of the opinion that the provisions were incompatible with the free movement of workers and capital which are required under European law. In particular, the Commission considered that there was a breach of the Treaty on the Functioning of the European Union (Articles 45 and 63 respectively). The request takes the form of a complementary "reasoned opinion". Spain has been given two months to respond and If there is no satisfactory response , the Commission may decide to refer the case to the EU's Court of Justice.

However, this may take some time, the Commission previously sent a reasoned opinion to Spain on 5th May 2010 and although Spanish legislation has been amended slightly, it is still not fully compliant with EU law. The Commission has therefore decided to send the latest complementary reasoned opinion requesting Spain to make additional changes to its legislation to ensure full compliance.

The deadline has now passed but so far there is no news of any response.

How Spain will respond, when this will be and how this will change the inheritance tax burden for none residents is not yet clear. The Spanish Government is in financial difficulties as it is and will be reluctant to give up this lucrative, if unjust, stream of revenue. However, Spain is now on notice and to delay the matter may lead to claims from beneficiaries who are adversely affected by Spain's failure to comply. This could lead to a similar situation to Capital Gains Tax which was also discriminatory and ultimately amended to be the same for non-residents and residents alike and also led to a deluge of claims for compensation from people who had paid the higher rate of tax as non residents.

If and when the inheritance laws are changed it would be well worth everyone with a property in Spain to consult their lawyer or accountant to see whether changes should be made to their wills to reduce or eliminate inheritance tax.