At
the outset of many estate planning cases which involve Spanish assets, advice
is required as to the options for ownership changes within the family.

A
typical scenario is: a married couple, who have owned their Spanish holiday
home for many years, but health/ mobility issues as they have got older, mean
that their use of the holiday home is on the decline. But meanwhile, their
children/ grandchildren are very happily ‘taking over the reins’!

In
terms of estate planning then, the Spanish property starts to become more of a
liability than an asset- particularly in terms of potential future inheritance
tax liability.

The
Spanish property is usually non-income producing (particularly in the light of
recently introduced increased bureaucratic requirements for short term lettings
in Spain). So, it seems logical that the ownership should be ‘passed down’
within the family, to reduce estate size/ future tax liability- but without any
loss of income (and still with the possibility of the continued occasional use
of the property by the transferor).

This
is logical in theory; but other than the obvious practical considerations (the
assumed continued solvency/ marital situation of the recipients; and assumed
continued harmony within the family), there are important additional
considerations which need to be borne in mind; including:

1. There
is a Spanish taxation liability for recipients of gifts of Spanish assets, the
calculation of which is broadly similar to Spanish Succession Tax, (but without
all the regional allowances and deductions). In other words, the Spanish
lifetime gift tax has a similar- or higher- impact on the recipient than if
they were to inherit the asset. (This is therefore entirely different in
concept to a Potentially Exempt Transfer under the UK IHT regime). There can,
of course, be situations in which the Spanish lifetime gift tax does not
counteract the fiscal wisdom of a lifetime transfer- for example, if in overall
(worldwide) estate planning terms, it is still advantageous to pass the Spanish
property down a generation (or two); or if a Spanish property can currently be
transferred at a low value- so a relatively low tax amount- when a future
increase in value is anticipated. It can be better in that case, for the next
generation to ‘enjoy’ the uplift in value, rather than storing up an ever
increasing Spanish Succession Tax liability in the original owner’s hands.

2. Further
on the Potentially Exempt Transfer point- whilst a UK tax payer making a gift
of their Spanish property within the family could constitute a Potentially
Exempt Transfer- so over time, it comes out of the worldwide taxable estate for
UK IHT purposes- one would need carefully to consider the fiscal consequences
of the donor failing to survive the qualifying period to achieve the maximum UK
IHT benefit.

3. Also
for UK nationals considering making a lifetime gift of a Spanish property
within the family, UK ‘gift with reservation’ considerations need to be addressed
and factored into the arrangements for any continued use of the Spanish
property by the donor. As would be the case with a UK asset which is gifted,
but then still used by the donor, the continued use of the asset needs to very
carefully documented/ financially accounted for, to avoid the gift failing for
UK IHT purposes; and the asset therefore not (fiscally) leaving the donor’s
estate.

4. A
change of property ownership in Spain can be effected by way of a sale between
family members rather than a gift- as often, the rate of tax on a sale is less
than the rate of tax on a lifetime gift. However, this type of transaction
would inevitably be very carefully scrutinized by the Spanish Tax Authority, to
ensure that the sale is not a sham, simply to reduce the taxation basis from
lifetime donation down to the sale taxation level. So, the property could not
be sold at an undervalue; and the Authorising Notary would actually need to see
evidence of funds passing between the the buyer and the seller. And of course,
the funds for the transaction cannot be provided by one family member to
another within Spain, otherwise that would be a taxable lifetime gift of the
money! So, any such transaction has to be extremely carefully orchestrated, to
be legally and fiscally compliant. And an assessment has to be made on a case
by case basis, as to whether or not this is advantageous when compared to a
lifetime donation transfer.

5. A
change of Spanish property ownership- even within the family- triggers other
costs and taxes, so these need to be factored into the equation. In addition to
the donation/ purchase tax, the additional expenses include Notary and Property
Registry costs; and Plus Valia tax (a local Town Hall tax payable on property
transfers, based on rateable value and length of transferor’s ownership. It can
also be necessary to update contracts for property services (water/
electricity, etc), and this can trigger a requirement for re-certification for
safety/ compliance purposes; and possible updating/ upgrading of supply
apparatus.

The
above is a non-exhaustive checklist of the issues. In the majority of the cases
we see, whilst a full analysis and discussion can be helpful, the conclusion is
that the costs and complexities of a lifetime transfer of a Spanish property
within the family outweigh the benefits. In this case, the focus returns to tax
efficient Spanish Wills and estate planning.

The
Legal 4 Spain team is always available to provide preliminary advice on a no-
obligation in estate planning cases involving Spanish assets.