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Spanish Estate Planning – The Coronavirus Effect

Spanish Estate Planning Posted on Sun, May 03, 2020 18:25:12

Introduction

Understandably, the focus of British owners of Spanish properties has shifted sharply away from Brexit anxiety, to concern about the consequences of the current coronavirus lockdown.

Implications for Spanish Estate Planning and Will Writing Cases

The Spanish property market has been paralysed, in the sense that in transactional terms, without Notaries and Registries operating in the usual way, it is not possible to buy or sell Spanish properties- and this will remain the case until the restrictions are lifted. Even thereafter, it is anticipated that there will be a substantial backlog, leading to significant delays before Spanish property transactions can be completed.

With the backdrop of what many analysts are predicting will be a sharp decline in Spanish property values, it is expected that many people (without an urgent need to sell), will accept that in ownership terms, they are ‘locked in’- deciding to retain their Spanish properties for longer than might have been intended- until conditions eventually improve. (This is in contrast to a very significant percentage of cases we have seen in recent years, where overseas clients have decided to ‘sell up’ in Spain as they get older- specifically to avoid what they see as the exposure to substantial costs and complexities for their families in having to deal with Spanish inheritance).

Indeed, we are already experiencing an increase in the number of enquiries from clients who were previously considering selling Spanish properties; but are now interested instead, in longer term Spanish Estate Planning; and mitigation of Spanish Succession Tax (‘SST’). This is a trend which we anticipate continuing during forthcoming months, possibly years.

Tax Planning

A more detailed analysis of the position will be required once the terms of Brexit have been finalised. However, the most recent Ruling of the Spanish Supreme Court is that citizens of countries outside the EU (thus including the UK, looking ahead, post-Brexit), will continue to enjoy the benefit of Regional SST Rates and allowances rather than reverting to National Rates and Allowances. So, as matters stand, it is anticipated that (post-Brexit) UK Citizens will continue to have the benefit in Spanish inheritance cases, of very substantial allowances (in some Autonomous Regions of Spain), before any SST is payable.

To take just one example, in the Autonomous Region of Andalucía, a spouse or descendent beneficiary can currently inherit assets up to the value of 1 Million € before SST is payable. This is irrespective of Spanish Resident or Non-Spanish Resident status. By contrast, the National Rates and Allowances (if they were to apply), would allow just under 16,000€ of Spanish asset value to be inherited before SST is payable.

So, on the face of it, UK Citizens now have less to be concerned about in terms of the SST / Estate Planning impact of Brexit, than had originally been feared.

But on the other hand, it is anticipated that in coming years (and logically, it should be sooner rather than later, as the current SST assessment system for Spanish nationals/ residents seemingly blatantly contravenes EU principles); there will be a unification of the SST system, meaning uniform rates/ allowances across Spain, rather than there being such vast regional discrepancies, as is the case currently. It is expected that a median will be determined; and inevitably the SST impact will decrease in some areas of Spain; but will increase in others.

As such, it remains extremely important in giving Spanish Will Writing/ Estate Planning advice, to bear in mind asset location-specific fiscal regulations; and to think long-term. Anticipating these awaited changes and incorporating in Spanish Wills, the essential legal machinery necessary (to the extent allowed within the confines of Spanish law and practice), in order to provide for flexibility in terms of succession routes- should that prove to be necessary in the fullness of time, in what promises to be an evolving fiscal environment.

Tax Planning in Spanish Property Purchases

As mentioned in previous articles, the point of acquisition of a Spanish property is the optimum moment to consider future ownership structure within a family, with a view to mitigating SST exposure. In turbulent market conditions, there are always those who are prepared to take advantage of what could possibly prove to be an astute moment to invest. But again, longer-term thinking is important in advising clients in these circumstances- especially if typical Spanish property ownership periods look set to increase. This also underlines the importance of intelligent / tax-efficient ownership structuring from the outset.

Spanish Probate

The current restrictions both in the UK (for legalising by Apostille, documents destined for Spanish legal process); and in Spain, for processing inheritance cases through the Notaries and Registries, are causing significant delays in cases (and will inevitably continue to do so for the foreseeable future- even for the first few months after the restrictions are lifted).

In the vast majority of Spanish inheritance cases, the standard deadline of 6 months from the date of death applies, to complete the Notarial process; to make fiscal submissions and to pay any tax due. Otherwise penalties/ interest are automatically added to the tax amount.

Spanish inheritance cases involving non-Spanish nationals/ residents are relatively more time-consuming (than standard Spanish cases); and generally, no material allowance is made for this in terms of time limits. As such, it is always very much in the interests of executors/ beneficiaries to commence the probate process in Spain (in Estates where there are Spanish assets), as soon as possible following the death. This will enable matters to be concluded within the required timescale and, as such, restrict any tax liability to the minimum possible.

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 Spanish Wills, Estate Planning and Inheritance cases where there are Spanish assets; also for Spanish property transactions generally.



Spanish Assets- Lifetime Estate Planning Update

Spanish Wills & Estate Planning, Uncategorised Posted on Fri, November 01, 2019 20:18:24

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.



Spanish Probate- Dealing with Onerous Spanish Assets

Sale of Spanish Assets Posted on Tue, November 27, 2018 16:51:40

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.



Why Spanish property owners need Spanish wills

Spanish Wills & Estate Planning Posted on Sun, October 15, 2017 13:01:49

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.



Spanish Succession Tax- The Impact of Location in Spain

Spanish Succession Tax Posted on Fri, June 02, 2017 20:52:25

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.