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Spanish Inheritance and Property Ownership- Anticipating Brexit

Spanish Wills &Estate Planning Posted on Thu, April 25, 2019 19:26:05

Introduction

Many people are reaching saturation point with the subject of
Brexit. But there are a number of recurring themes in questions being asked by
concerned clients who own Spanish properties. Some are clear, irrespective of
the final outcome of Brexit- others not quite so. Briefly to deal with the top
5:

1. Validity of Spanish Wills

We have always strongly recommended
British nationals who own Spanish assets to make a separate Spanish Will
covering those assets. This helps to minimise the risk of delays and excessive
costs in Spanish probate; and also ensures procedural and beneficial certainty.

The Brussels IV Directive
provided that with effect from 2015, the place of ‘habitual residence’ of a
deceased British national would principally determine which country’s
succession law applies to the succession of their estate in Spain. However, a
lifetime declaration can be made (usually in a Will) overriding that- so a British
national can, for example, elect for the law of England and Wales to regulate
the succession of Spanish assets instead of Spanish ‘forced heirship’. This is
the case even if the British national testator is resident in Spain.

Brexit will not affect the
validity of properly executed and registered Wills of Spanish assets previously
signed by British nationals; nor will it invalidate correctly made declarations
of choice of applicable succession law.

However, this is still a
very opportune moment for Spanish Wills to be reviewed, in particular to ensure
maximum tax efficiency; in view of the succession tax changes which are on the
horizon.

2. Spanish Succession Tax Impact

EU citizens (wherever they are resident), who are inheriting
Spanish assets, currently have the benefit of the individual Autonomous Regions’ Spanish Succession Tax (SST) exemptions and
allowances. In Andalusia for example, this currently includes a 1 Million Euro
exemption per beneficiary.

In contrast, non-European beneficiaries of Spanish assets who are not
fiscally resident in Spain, have the benefit a ‘National Rules’ SST exempt
amount per beneficiary of just under 16,000 Euros.

Once Brexit occurs, (so British nationals will no longer be EU
individuals), it is anticipated that they will only have the benefit of the individual Autonomous Regions’ SST exemptions
and allowances if they are fiscally resident in Spain. Conversely, for others
who are not fiscally resident in Spain, this would operate drastically to
increase SST impact- even on Estates with relatively modest Spanish asset
values; and even on inheritance between spouses.

There are SST saving provisions which can be incorporated in Spanish
Wills in appropriate cases, to mitigate SST impact. This is whether the concern
is about post-Brexit SST changes, or the consequences of the future unification
of the SST system (considered to be inevitable, for Spain to continue to be
EU-compliant). The latter is anticipated to provide for standard / averaged SST
impact across Spain, wherever assets are located (in the way that UK IHT is
applied, for example). Many areas of Spain could see an increased SST impact as
a result of this.

3. Spanish Fiscal Registration/ NIE Numbers

Non-
Spanish individuals are required to have a Spanish Fiscal (‘NIE’) number in
order to acquire or inherit Spanish assets. New requirements are being
introduced currently across Spain for non- Europeans (including British
nationals already), for obtaining NIE numbers. These include the annexing of a
colour copy of every Passport page to the Notarised Power of Attorney- when a
Spanish professional representative is dealing with the fiscal registration.
Also, it can take many weeks to get an appointment at the Spanish Police
issuing office (Comisaría de Policía), so this is something which must be
attended to urgently at the outset of any Spanish inheritance or property case;
to ensure timescales can be met in completing fiscal registration. Otherwise,
inheritance cases can stall/ or property transactions can even fall through-
all over what used to be a swift and simple process, but which is now lengthy
and full of traps for the unwary.

4. Becoming Spanish Resident

For EU citizens, becoming Spanish resident has generally
been a relatively straightforward exercise in recent years. However, non- EU citizens (who do not have the benefit of ‘freedom of
movement’ rights within the EU), have always had to meet additional
requirements. Throughout Spain, there has been a rush of British nationals
seeking Spanish residency in recent months- in the lead-up to Brexit. As such, waiting
times for appointments have become greatly extended, meaning that many now will
have to satisfy tougher (non- EU) criteria to qualify for Spanish residency. These
include: a criminal record check; proof of adequate income/ capital; and a
place to live. Also, (and expensively in insurance terms for older people), proof
of medical cover. Until now, it has been straightforward for British nationals
to prepare for and attend Spanish residency appointments personally. But with
the changing requirements and greater scrutiny of the information and
documentation required, it is recommended that the services of a Spanish
administrative specialist (‘gestor’) are engaged. Otherwise, this can become an
extremely protracted and frustrating process.

5. Taxation of Spanish Holiday Homes

Many British nationals who
own holiday homes in Spain rent them out from time to time, to cover running
costs; and/or to derive some asset income.

A consequence of British
nationals no longer being EU Citizens, is that we anticipate the loss of the
beneficial tax treatment which EU Citizens enjoy for non-resident rental income
received. This impacts on: income tax rate; permitted deductions for income tax
purposes; and also capital gains tax. Coupled with recently introduced laws in
Spain to regulate holiday lettings, (the fiscal and bureaucratic complexities
involved in letting out a Spanish holiday home- even for a few weeks each year-
are such that many are concluding that it is no longer feasible. Renting out a
Spanish property may well prove to be less profitable than hoped). For those
who do wish to persevere, it is extremely difficult to sidestep the need to
engage a Spanish accountant to deal with the compliance/ accounting- further
adding to the cost base, of course.

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; and Spanish property transactions.



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.



Spain- Succession Tax and Inheritance Planning Update

Spanish Succession Tax Posted on Sun, May 13, 2018 22:24:54

Introduction
The major changes
introduced in Andalusia at the beginning of 2018 for the calculation of Spanish
Succession Tax (SST) liability are of note generally, when dealing with estate
planning and inheritance cases which include Spanish assets.

Andalusia
is only one of 17 Autonomous Regions within Spain

Whilst in Spain, the individual Autonomous
Regions set their own exemptions/ allowances, a very
significant proportion of Spanish properties owned by British nationals are actually
situated within Andalusia. Hence, an awareness of the SST rules in Andalusia is
particularly important for estate planning professionals who deal with cases
including Spanish assets.

Movement
towards reduced SST Impact

The recently introduced fiscal changes in
Andalusia followed a concerted social and political campaign in Spain against
the previous rules- which in many cases, led to inconsistent and onerous
treatment of beneficiaries. Several other Autonomous
Regions had previously capitulated to this type of pressure; and had taken
steps to reduce SST Impact.

Now that Andalusia has similarly
acted, it is anticipated that Autonomous Regions which (for now),
continue with harsher SST rules, could over time, also introduce less stringent
rules. In general terms, the policy trend in Spain certainly appears to be
towards reducing SST impact.

Also, many commentators continue with the view that the
imposition by Autonomous Regions of different SST rules also
creates discrimination between EU citizens- depending on where in Spain their
property is situated. The view being that it is inevitable eventually, that
Spain will be forced to centralise/ standardise the SST policy across all the
Autonomous Regions, to bring an end to this anomalous
situation.

Andalusia’s
New SST Rules

The effect of the new rules is that spouses and parents/
children/ grandchildren who individually inherit assets within Andalusia which
do not exceed 1 Million Euros in value, pay no SST- by way of an exemption. But
as always, there are various important ‘small print’ points:

·
The new rules only take effect in
relation to inheritance which arises from deaths occurring after 1 January
2018. There is no retrospective effect.

·
The new rules do not benefit
beneficiaries who fall outside the strict marital and ascendency/ descendency
relationship groups indicated.

·
Any beneficiary who has wealth above
1 million Euros in value before the inheritance in question does not
have the benefit of the new exemption.

·
For cases where the actual amount
inherited exceeds 1 million Euros in value, then it is only the amount above 1
million Euros which is taxed. (Previously this was not the case. To exceed the
exempt amount even by one Euro meant that tax was then paid on everything-
subject only to very small allowances).

Issues for
British owners of Spanish Properties

·
As was previously the
case, EU individuals inheriting properties in Spain continue to have the
benefit of the individual Autonomous Regions’ SST exemptions
and allowances, irrespective of their country of actual residency. This extends
to the new rules of Andalusia, including the 1 Million Euro exemption.

·
However, once Brexit occurs, (as
British owners of Spanish properties will then no longer be EU individuals), it
is anticipated that they will only have the benefit of the
individual Autonomous Regions’ SST exemptions and allowances provided
that
they are fiscally resident in Spain.

·
So post-Brexit, family owners of
Spanish properties who continue to live mainly in the UK (and, for example,
just have a holiday home in Andalusia), will instead of having an SST exempt
amount per beneficiary of 1 Million Euros, have an SST exempt amount per
beneficiary of just under 16,000 Euros!

·
In estate planning terms therefore,
it is essential to bear in mind where potential beneficiaries are fiscally
resident. In many cases of English individuals who have retired to Spain, for
example, if their children remain living in the UK, then the family Spanish
assets remain very much exposed to SST.

·
For this reason, although the
headline-grabbing increase in the SST exempt amount has come as a relief to
many families, there are a very significant number of British families with
properties in Spain where (and even more so, anticipating the post-Brexit
situation), there is very little in the way of SST protection. So, intelligent estate
planning; and having in place tax efficient Spanish Wills, remains as important
as ever, for English families with properties in Spain.

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.



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.



Spanish Succession Tax- In Anticipation of Brexit…

Spanish Succession Tax Posted on Tue, May 09, 2017 22:26:45

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 Spanish Residents
and Non-Spanish Residents.

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

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

Brexit

It is considered probable by most commentators, that
the Spanish Succession Tax treatment of British owners of Spanish properties is
likely to change again in the light of the Brexit Referendum decision.

In principle, (as regards British owners of Spanish
properties who are not actually resident in Spain), the Spanish Tax Authority
will no longer be obliged to comply with the EU principles which require equal
treatment of EU citizens.

It remains to be seen exactly how the negotiation
between the UK and Spain will be concluded as regards fiscal issues. But, it is
considered probable that once the UK is outside the EU, (non-Spanish Resident)
British owners of Spanish properties will lose this special EU benefit, and
will again be subject to the much more onerous ‘national’ Spanish Succession
Tax rules, as applied by the Central Spanish Tax Office.

This would strip from British (but non-Spanish
Resident) owners of Spanish properties, the more ‘generous’ succession tax allowances/
exemptions which the autonomous communities within Spain otherwise currently offer.
So, a meagre succession tax-free inheritance amount of just below 16,000 Euros
per spouse/ descendent beneficiary is then allowed. Any inheritance received
above that value is taxable.

Conclusion

Well advised British owners of Spanish properties
(but who are not actually resident in Spain) should therefore review their
Spanish Wills and Estate Planning arrangements, to be prepared for this anticipated
consequence of Brexit.

The tax mitigation steps which are recommended to
prepare for this anticipated consequence of Brexit, are in fact, intelligent
estate planning steps to take, even if the outcome of Brexit in this context is
less onerous than expected.

So, in other words, a Spanish Wills and Spanish Estate
Planning review is recommended as a wise process to go through in the run-up to
Brexit- whatever the outcome of negotiations between the UK/ the EU. It is quite possible that the Spanish tax
exposure can be reduced- whatever the end result of Brexit.

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.