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Usually, the recipient of an inheritance receives an asset of positive value; this being almost universally the intention of testators, in making Wills.

However, even in the post- financial crisis period in Spain- where property values are gradually increasing in most areas now- many inheritance situations arise in which a very careful analysis has to be carried out. This is required, to ensure that there is, in fact, positive net value to the beneficiaries. Surprisingly frequently, the net value to the beneficiaries in Spanish inheritance cases can in fact, prove to be negative.

Some examples of potentially problematic cases are:

1. Negative Equity Cases.

In the years leading up to the financial crisis (in particular 2001-2007), Spanish banks became very relaxed about the loan to value ratio on new mortgages. In many cases, loans were made which exceeded 100% of the property’s value/ purchase price- funds being made available to borrowers also to cover purchase costs and taxes; and property improvement works/ furnishing, for example.

The drop in the Spanish property market during the period 2007-2013 in many areas of Spain was so severe, that in many cases, values of mortgaged properties fell to 50% of the loan amount secured against the property. Even after a few years of recovery, many Spanish property owners remain in negative equity, even though they maintain mortgage payments, so as not to lose their home- and in the hope that values will eventually increase to the level at which there is positive equity.

In any Spanish inheritance case where there is a mortgage (especially what appears to be a high mortgage amount relative to the property’s estimated value), it is essential to obtain a professional independent valuation of the property as early as possible in the probate process. Apart from anything else this valuation will be used to carefully assess the taxes and costs which will be payable in the Spanish inheritance process. In addition, there are taxes and costs which would be payable in the Spanish property sale process (if the property were to be sold on the open market).

Total Spanish property sale taxes and costs can amount to approximately 12% of gross sale price; and total Spanish probate taxes and costs can often be between 5-10% of Estate value. So, the combination of all these taxes and costs can significantly erode the net value of an inherited Spanish property, which is then intended to be sold on the open market.

It is incumbent upon the Spanish probate professional representative to carry out this assessment; and to advise beneficiaries accordingly. Failure to advise beneficiaries that the net value to be inherited is negative (if that is the case); and as to the options which are therefore available to the beneficiaries, would be a serious dereliction of the professional’s responsibility to the client.

2. Equity Release Cases.

This is a specific type of situation within the negative equity genre of case. There was particular growth in sales of equity release packages in the pre- financial crisis period in Spain; and the percentage of negative equity situations arising from equity release cases is still particularly high. In any Spanish probate case where there is an equity release loan, it is essential at the outset, to obtain a completely up to date statement from the lending company/ bank; and to get comprehensive details as to the calling in/ redemption of the loan, to be able to make early calculations; and advise beneficiaries as to the viability of inheriting.

3. Low Asset Value Cases.

In many Spanish probate cases- particularly where there is no real estate interest in the Spanish Estate, there remain other minor assets, such as a vehicle or a bank account in the name of the deceased. In some circumstances, a simplified Spanish probate process is possible; avoiding the complexity and cost of a Notarial Deed- but not a fiscal declaration, which is always required. But in many other Spanish probate cases (and every case where there is a real estate interest in the Spanish Estate), the ‘full blown’ Spanish probate process is legally necessary- including the execution of a Notarial Deed. As such, the basic costs of the Spanish probate process are such that, in many cases, they exceed the value of the assets in question.

Solutions

The role of the Spanish probate legal representative in cases where asset values fall short of inheritance taxes and costs, is to advise the beneficiaries as to the options they have available to them.

In some cases, although it may appear wasteful or irresponsible, it is advisable and safe to take no action; so neither to inherit nor to renounce.

In other cases, renunciation is advisable. But even formally to renounce a Spanish inheritance entitlement, the Spanish legal representative may need a Power of Attorney signed by the beneficiaries- and possibly also the execution of a Spanish Notarial Deed. Both of these processes involve costs on the part of the beneficiaries- (aside from the professional charges of the legal representative). So, costs still need to be carefully evaluated, even in the event of a renunciation of a Spanish inheritance entitlement.

Finally, and very much a last resort (and ensuring, of course, that the very strict Spanish law professional conduct rules and fiscal compliance details are fully adhered to); some Spanish legal representatives are willing in certain cases (by specific written agreement with the beneficiaries), to step in; claiming the inheritance in the name of the beneficiaries, but then to retain for themselves an asset.

This can be a feasible solution where the cost to the beneficiaries to inherit would otherwise exceed the net value of the inheritance. If the legal representative does not have to incur third party professional charges, then it is possible that there could still be a net benefit to the legal representative of receiving the asset in place of the beneficiaries- at least then leaving a ‘clean’ situation. And assuming the financial situation allows that, with at least some financial compensation then being paid to the beneficiaries by the legal representative.

The above 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 Spanish inheritance cases.

For owners of Spanish properties, the importance of making a Spanish Will is paramount.

In general terms, a correctly executed Spanish Will ensures certainty, speed and economy in the event of Spanish probate; and also provides the facility for tax efficiency.

Conversely, the consequences for the beneficiaries of a non-Spanish national who dies leaving Spanish assets, but no Spanish Will, can be unexpectedly onerous. In our Spanish probate practice, to date, there is not a single case where we have not found a solution to complete Spanish probate- however unusual the circumstances.

In a few exceptional cases, whilst it has been possible to ‘unlock’ the Spanish property by completing the Spanish probate case, the combination of the failure of the deceased to make a Spanish Will and the consequential forced application of Spanish legal and fiscal principles, has inevitably created situations of significant complexity for those left behind. A couple of examples will illustrate the point.

Intestate Spanish resident

A deceased English lady, estranged from her three adult children from her first marriage, since her second marriage 25 years ago. She died totally intestate. She had taken Spanish residency along with her second husband, in her final years. She had verbally expressed her intention that her surviving husband (and co-owner of the Spanish property) should receive her 50% interest in the Spanish property in the event of her death.

As the deceased was habitually resident in Spain at the time of her death, in the absence of any legally binding direction for English succession law to apply (by her not having made a Spanish Will), Spanish succession law had to be applied.

Spanish succession law generally operates to protect the interests of descendants- therefore in this case, necessitating the long- estranged deceased’s children’s involvement in the Spanish probate process.

The deceased’s children (after no contact in 25 years), had to be traced through genealogy professionals. Rejecting the proposal simply to renounce their entitlement, as had been hoped, the deceased’s husband is left with a
restricted interest in the Spanish property- now being a co-owner, along with his deceased spouse’s children- whom he had never even previously met.

Had the deceased signed a simple Spanish Will containing an expression of her wish for her husband to inherit- pursuant to English succession law, her husband would have enjoyed a comfortable retirement; and he would have been able to sell the Spanish property as he had planned with his late wife; enabling him to return to live in England. He would have received the Spanish property sale proceeds following his wife’s death.

Instead, he remains in Spain with all his wealth tied up in a Spanish property, which is now co-owned along with individuals who are not known to him; and whose willingness to co-operate is directly linked to ill-feeling over the demise of their parents’ marriage 25 years ago.

In fact, had it not been possible to find the solution we did, the situation would have been significantly worse for all concerned, with the property totally ‘locked’ in legal terms; and selling or dealing with (mortgaging/ letting) the property would have been totally impossible. Our solution of the case at least provides a framework for the family to come together and settle terms between them for the disposal of the property- which could then be effected without any further legal complications.

An English resident couple in a civil partnership with a property in Spain

Each had English Wills leaving their respective worldwide Estates to a common friend. Each partner then intended as part of their overall Estate planning, to sign a Spanish Will leaving a life interest in their respective shares in the Spanish property to the surviving civil partner, with the underlying legal title in the Spanish property passing down to the common friend. This intended Estate planning strategy would have resulted in a zero Spanish Succession Tax bill for the surviving partner; and his having a secure lifetime interest, guaranteed for his remaining years- living unencumbered in the Spanish property.

But the failure (by the partner who then died before signing his Spanish Will), to act promptly in signing the Spanish Will as planned, meant that the surviving partner was unable to claim the intended lifetime interest in the Spanish property.

And furthermore, because of a quirk in the regional rules for calculation of Spanish Succession Tax, this also led to a total Spanish Succession Tax bill of more than 3 times the amount it would otherwise have been (from 20,000 Euros up to more than 60,000 Euros).

So, again, the best possible solution in the circumstances was found for the case to ‘unlock’ the Spanish property. But the failure of the deceased to have put in place a Spanish Will with tax efficient Estate planning, unavoidably frustrated his testamentary wishes; and also left an unnecessarily high level of tax exposure.

The Legal 4 Spain team is always available to provide preliminary advice on a no-obligation basis in relation to Inheritance and Estate Planning cases where there are Spanish assets.

Background

It is well over 2 years now, since the European Court of Justice’s Ruling, that the Spanish Tax Authority’s succession tax system conflicted with the European Union principles of freedom of movement of EU individuals and circulation of money within the EU.

That case was specifically in relation to the distinction the Spanish Tax Authority previously made between those who were resident in Spain; and those who were non-resident.

The Ruling was that Non-Spanish Residents (who were also Europeans) should be treated in the same way as Spanish residents, for the purposes of Spanish Succession Tax.

Following the Ruling, Spain revised its practice, as required; and now (for example), British owners of Spanish properties are treated in the same way for Spanish Succession Tax purposes, irrespective of whether or not they are resident in Spain.

But although the Spanish Tax Authority is now compliant in terms of the Spanish residency/ non-Spanish residency distinction, there remains a separate glaring inconsistency in approach, which also amounts to discriminatory treatment of EU individuals.

That is the different levels of Spanish Succession Tax impact, according to which Autonomous Community within Spain is the charging Tax Authority in the case in question.

Continuing Discrimination

In many countries, the calculation and charging of succession taxation is simplicity itself. However in Spain, it is a highly complex system, which creates a great deal of uncertainty, inconsistency and controversy.

Spanish Succession Tax is not always administered centrally; nor is it charged in a uniform way nationally; nor is it charged at a single rate; nor is it subject to universal national allowances and reductions.

At the heart of the complexity is the fact that for Spanish nationals/ Spanish residents, the responsibility for Succession Tax administration lies with the 17 individual autonomous communities within Spain. Each autonomous community has discretion as to charging basis; practice; and allowances/ exemptions.

This fiscal quagmire creates bewildering inconsistencies across Spain. On the attached image, the Spanish Succession Tax impact is indicated, based on the same Estate details, but varying according to which is the applicable Autonomous Community. And, as a very noteworthy side issue, it is not only foreign owners of Spanish properties who are exposed to the unfairness of this perplexing system; but it has been acknowledged that many Spanish families living in Spain themselves suffer this arbitrary discrimination under the current system, according to where (in Spain) their family members live.

Conclusion

It remains to be seen whether this very worrying anomaly will be regularised by centralizing/standardising administration of Spanish Succession Tax; or (if that is deemed too radical), at least a harmonisation of practice across Spain.

For non- Spanish owners of Spanish properties, they are fortunate, in that there are opportunities in Spanish Wills and estate planning, to mitigate this exposure to Spanish taxation; and expert advice is recommended to ensure that the fiscal impact is minimised; in planning for future inheritance.

This general commentary is not intended to be exhaustive; and case-specific legal advice should always be sought.

The Legal 4 Spain team provides a full Wills, Estate Planning and Probate service for properties and other assets anywhere in Spain. We are always happy to provide a competitive cost estimate in the first instance, on a no-obligation basis.