Introduction
British owners of Spanish properties await the Brexit conclusion, to know whether or not the Spanish Succession Tax (SST) reductions which are currently enjoyed by European citizens, are to be relinquished.
But irrespective of the final Brexit outcome, many British owners of Spanish properties are in any event, anticipated to be exposed to increasing Spanish Succession Tax (SST) impact in coming years.
SST exposure and the mitigation of tax liability generally, therefore need to be considered in all cases of Spanish Estate Planning and Will writing. It is also important that these aspects should not be overlooked in Spanish property purchase and probate cases, where there is flexibility/ discretion as to beneficial entitlement.
The Spanish Autonomous Regions and Tax Liability
Spain comprises 17 Autonomous Regions, which are currently able to set their own SST exemptions/ allowances.
In recent years, there has been a move in some of Spain’s Autonomous Regions towards reduced SST impact.
However, the imposition by respective Autonomous Regions of differing SST rules has given rise to discrimination between EU citizens- according to where in Spain the assets in question are situated.
As this situation is considered to be non-EU compliant, it is anticipated that sooner rather than later, the SST system will be required to be unified, and SST impact standardised across Spain. Low SST-impact areas like Andalusia and areas of the East Coast (the locations of a significant proportion of the British owned Spanish properties), could therefore see a substantial increase in SST exposure as a result of this process.
Implications for Spanish Estate Planning and Will Writing Cases
Unlike UK Inheritance Tax (which is assessed on the deceased’s Estate), SST is levied on the individual beneficiary. So, key considerations in seeking to mitigate SST exposure include the relationship between the testator and each beneficiary; and the number of beneficiaries.
Spouses and descendants face the lowest level of SST impact; and generally each individual beneficiary has allowances, and relatively low SST rates on the lowest value-related tranches. So, to have multiple immediate family members as beneficiaries, each with a relatively modest entitlement, is generally a positive way to reduce overall SST exposure.
It is also possible to split beneficial entitlement to (Real Estate) property titles between the ‘Usufructo’ (life interest) and ‘Nuda Propiedad’ (underlying legal title). This can reduce SST impact without adversely affecting (for example) a surviving spouse’s lifetime use and enjoyment of a Spanish property. So, a ‘Trust-like’ ownership structure can be established in this way, even though Spanish Law does not recognise Trust structures in principle.
It is accepted by the Spanish Authorities now, that alternative succession routes (at the discretion of a surviving spouse for example, following the death), can be included in Spanish Wills. So in this way, one can circumvent the fact that (unlike in the UK), post-death Will variations in Spain are in principle, not an option. This feature then enables up to date case-specific fiscal advice (multi-jurisdictional, if applicable), to be obtained following a death (and family circumstances then to be assessed), before a final decision is taken as to the actual succession route to be implemented.
Tax Planning in Spanish Property Purchases
The acquisition of a Spanish property is the ideal point at which to consider future ownership structure within a family, with a view to mitigating SST exposure.
Considering the age and life expectancy of each family member who might be a registered owner of the Spanish property is an important aspect. As is the consideration of whether multiple registered owners might be appropriate (to spread value; and therefore SST impact). The Usufructo/ Nuda Propiedad split mentioned above, can provide an opportunity to pass down capital value a generation or two, whilst retaining beneficial use and enjoyment. But British individuals need to give careful thought to UK tax law rules on lifetime gifting and UK IHT planning/ impact on the UK IHT Nil Rate Band. Also, any gifting of property or money needs to be carefully effected, so as not inadvertently to trigger Spanish lifetime gift tax liability.
Spanish Probate
As mentioned above, it is now possible within Spanish asset Wills, to include flexibility as to the succession route. But even in traditional format Spanish Wills, it is important to assess any alternative options as to succession route which exist by implication, based on the specific Will wording, on a case by case basis. This enables alternative succession routes (and possible SST savings), to be considered before the Inheritance Deed is signed; after which it is then too late.
Conclusion
The foregoing is non-exhaustive, general advice. The Legal 4 Spain team is always available to provide preliminary advice on a no-obligation basis in relation to Estate Planning and Inheritance cases where there are Spanish assets; also for Spanish property transactions generally.
