Marriage and its effect on inheritance tax in Spain

Filed under : Family Law

Most ex-patriates from the UK will be acquainted with the fact that if you are domiciled in the UK,
any assets bequeathed to a wife or husband are tax free under the spouse
exemption rule. However, many people are surprised to learn that the spouse
exemption does not apply to any assets in Spain,
including property.

There are however definite advantages to being married from
a Spanish inheritance tax point of view, most of all if you are non-residents.
The way inheritance tax is charged in Spain,
differs completely from the UK.
In the UK, it
is the estate that is charged inheritance tax (at 40%) after having deducted
exempt beneficiaries (spouse and charities), any allowances (such as business
or agricultural property relief) and the nil rate band (tax free allowance,
currently £300,000).

In Spain,
the estate is divided up in accordance with the will or the rules of intestacy
so that each beneficiary’s share can be calculated. The beneficiary is then personally
responsible for the inheritance tax, which is calculated on the basis of their
personal circumstances. The tax rules take into account the relationship
between the deceased and the beneficiary, the residential status of both, the
pre-existing wealth of the beneficiary and in some circumstances, their age.
The tax is then calculated from a table published by the tax office and the
autonomous regions. The regions in Spain have complete autonomy over the inheritance tax rules for residents of that
region. Many regions have now abolished inheritance tax for residents.
Non-resident beneficiaries have to declare and pay inheritance tax at the
central office in Madrid.

For non-residents, the spouse receives an allowance of
€15,956.87 after which inheritance tax is paid on everything received. This
clearly is a very small allowance which would mean that a surviving
(non-resident) spouse would normally be liable to pay inheritance tax. The same
allowance is given to children over 21, younger children get a larger allowance
and brothers and sisters about half that of a spouse. The tax is then charged
on a sliding scale basis, basically the more you receive, the higher the
percentage rate applied when calculating the tax. For example, the first
€7993.46 is taxed at 7.65% whereas the tax rate for amounts received
between  €119,757.67 and €159,634.83 is
18.70%. The figures are quite obscure as they were originally based upon the
peseta. The top tax rate, if you receive over €797,555.08 is 34%.

However, there is a further shock for non-married couples.
If they wish to leave their assets to each other then the tax calculated from
the tables is doubled! Furthermore, there is an additional increase if the
recipient has high pre-existing personal wealth in Spain

which means a possible top rate of tax of 81.6% on everything received as there
is no allowance for non-married partners.

So it is quite obvious that for non-residents, there is a
significant advantage in being married if you wish to leave everything to your
partner. For residents, this will depend on the applicable law of the region
you are resident in. In the Canary Islands, for example, the resident spouse
receives an allowance of €18,500 after which inheritance tax is paid, and from the
1st January 2007 resident non-married couples who are to be considered “parejas
de hecho” according to the Canary Islands Law 5/2003, are assimilated to
married couples for inheritance tax purposes and receive the same allowances as
if they were married. Therefore thanks to this recent change in the Law the
effects of marriage on inheritance tax in the Canary Islands

are not so important (but this is quite different in other Spanish autonomous
regions).

According to the new Canary Islands

law, the €18,500 allowance applies also to children older than 21. Furthermore the
law establishes various inheritance tax allowances for children younger than 21.
First of all, there is a general allowance of €18,500 and a further allowance
of €4,600 per year below the 21. If the child is younger than 18, then the
allowance is 100% of the taxable amount until a maximum allowance of €1,000,000,
which means that if the child inherits less than €1,000,000, then there is no
tax to pay. Should the child receive more than €1,000,000, then he would
receive an allowance of €1,000,000, after which he would pay inheritance tax.   


In the Canary Islands there is a
further allowance given to children younger than 18: a reduction in value of
the home for the purposes of the inheritance tax calculation. In fact in this
case the value of the house that the child receives is reduced by 99% for the
purposes of inheritance tax.  The big
drawback to these allowances is that the law stipulates that the recipient of
the allowance cannot sell the property for five years. If they do, they must
pay the extra tax plus interest. If the house is received by the spouse or the
surviving partner of the “pareja de hecho”, then the value of the house is
reduced by 95%, with a limit of €122,606.47 euros, and with the same obligation
of not selling the property for five years.

 The value to be declared for inheritance tax purposes is the
real value of the house, which corresponds to the market value of the property in
the area. It is advisable to ask for a valuation from the local Tax Authorities
in order to avoid any problems in case of verification of the declared value.

For co-habiting couples, there are ways to reduce the
potential inheritance tax burden.Get married if you are non-residents – as can be seen above
there are definite advantages to this.

Reduce the equity in the property – buy with a mortgage or
take out a mortgage or equity release scheme. Change your will – to include other related beneficiaries
such as children who will not be taxed as highly.It is always advisable to make a Spanish will for your
assets in Spain especially for non-married couples. A good lawyer can advise you on your tax
position and how the dispositions in your will can mitigate inheritance tax.

 For more information on this subject, or to make an appointment for a
private consultation, please contact us at De Cotta Law, De
Cotta McKenna & Santafé
on:

Tel.: +34 952 931 781
Fax: +34 952 933 547