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Ways to avoid or reduce Spanish Inheritance tax: Analysis of the different ways

In order to explain the different ways to avoid or reduce Spanish Inheritance Tax, we will use an example:

–       A+B, British and Spanish residents own a Spanish property.  They have 62 years old. They have 2 sons. Sons are not Spanish residents.

–       Both have made a “mirror Will” (A leaves everything to B, and vice versa), and when both die leave everything 50 % to both Sons.

Unfortunately, we cannot give you too many options to reduce Inheritance tax to the  Sons. But,  pay attention to the fact that  there are determinate offers in the market to avoid or reduce Spanish IHT. Please, do not believe in all of them!.

Before you decide to go you should consider the following analyzing  some of the options offered in the market by some companies:

1.- Passing the Usufructo to your inheritors while you are living:

It means, that A+B must pass the “nude” ownership of their property to their Sons, while A+B keep the use of the property for the rest of their lives.

Problem: A+B have to pay notary, land registry fees, and 7 % Transfer Tax of the nude property. Usually, the Usufructo can be an average of 30 % of the total value of the property.

So, being the example used for 300.000 EUR, A+B could pass 210.000 EUR to their sons, and then pay for it the following:

–      10% Transfer Tax: 210.000 *10% =21.000  EUR

–       Notary + land registry =1.200 EUR (approx.)

–       3 % Capital Gains (if A+B were no Spanish Fiscal Resident): 6.300 EUR

–       Plusvalía : Depend on the area and the type of the property: +- 1.000 EUR.

Then, when A+B pass away,  sons would receive the remaining 90.000 EUR. So, 45.000 EUR each.

–       Son 1 = 40.000- 16.000 EUR (Exemption) = 24.000 EUR. So, following the IHT scale, pays 2.000 EUR.

–       Son 2 = 40.000- 16.000 EUR (Exemption) = 24.000 EUR. So, following the IHT scale, pays 2.000 EUR.

2.- To create a Spanish company: A+B must create a Spanish company, and transfer the  property into the Spanish company:

  • Expenses to create the company: +-3.000 EUR
  • Yearly expenses to run the company: +-3.000 EUR
  • Expenses to pass the property to the company:

–       7% Transfer Tax = 300.000 * 10% =30.000 EUR
–       Notary and Land Registry = 1.200 EUR
–       3 % Capital Gains (if you are no Spanish Fiscal Resident): 9.000 EU.

–       Plusvalía : Depends on the area and the type of the property: +- 1.000 EUR.

Once A+B proceed in this way, then they can create shares to their sons, which must be paid with a Tax of  1,5 %, plus notary and company registry fees.

3.- To create an off-shore company or trust, and transfer the property to the off-shore company:

  • Expenses to create an off-shore company: ?
  • Yearly expenses to run the company in the off-shore country: ?
  • Yearly expenses to run the property in Spain by an off-shore company:

– Fiscal representative :+- 3.000 EUR
– General expenses: +- 3.000 EUR
– Spanish Income Tax for off-shore companies : 3 % of the              catastral value (every year)

  • Expenses to pass the property to the company:

–       7% Transfer Tax = 300.000 * 10% = 30.000 EUR
–       Notary and Land Registry = 1.200 EUR
–       3 % Capital Gains (if you are no Spanish Fiscal Resident): 9.000 EUR.

–       Plusvalía : Depends on the area and the type of the property: +- 1.000 EUR.

Once A+B proceed in this way, then they can create shares to pass them to their sons, which will pay stamp duty in the country  of the off-shore company (Isle of Man, Luxembourg, etc.).

4.- To create a UK company and transfer the property to the UK company:

  • Expenses to create an UK company: ?
  • Yearly expenses to run the company in UK: ?
  • Yearly expenses to run the property in Spain by an UK company:

– Fiscal representative :+- 1.000 EUR

– General expenses: +- 3.000 EUR

  • Expenses to pass the property to the company:

–       10 % Transfer Tax = 300.000 * 10% =30.000 EUR
–       Notary and Land Registry = 1.200 EUR
–       3 % Capital Gains (if you are no Spanish Fiscal Resident): 9.000 EUR.

–       Plusvalía : Depends on the area and the type of the property: +- 1.000 EUR.

Once A+B proceed in this way, then they can create shares to pass them to thir sons, which could pay stamp duty in UK.

5.- To create a mortgage on the property to reduce expenses: We personally do not recommend A+B to lose their time in this option, because:

–       Banks will not be happy to mortgage a property now (crisis time) when the debtor is over 50-60 years old.

–       This mortgage is risky so, conditions, commissions, and interest rates will be higher than the normal.

–       The bank will never give you the full amount of the value of the property.

–       The mortgage use to be required to be re-paid fully at the time of the death by your inheritors.

–       A+B have to pay also mortgage expenses like notary, land registry, stamp duty, etc

IMPORTANT NOTE: On 14/1172013, it was considered by the CENTRAL OFFICE TAX IN MADRID, that to create a company just with the aim to avoid IHT it is considered as ILLEGAL, and FRAUD, and may create criminal and negative consecquences,  to the ones that organize or participate in these kind of strategies. Obviously, this does not affect to current existing companies with determinate activity in bussiness, or those create with a different purpose than to just avoid Spanish taxes.

So, TLACORP expressly do not recommend to any of our clients to CREATE a company, wiht no other activity different than to avoid to pay taxes in Spain.


9 Responses

  1. Pingback : CONSULTATION IN SPANISH INHERITANCE TAX. | Spanish Solicitors

  2. Clive Walley

    Hi,

    I am 69 yrs old UK expat resident in Spain for the last 7 years. I own a villa which is worth anywhere between €300K and €350k in value. I married a young Chinese lady 2 years ago and she has been resident in Spain for that time too. I wish to leave my villa to my wife upon my demise but am worried about her potential exposure to IHT. Currently the property is owned 100% by me.

    We live in the Valencia region. Can you please advise me on the total tax amount she is currently exposed to?

    Kindest Regards

    Clive Walley

  3. admin

    Dear Sir,

    Thank you very much for your question in relation IHT in Valencia Region.

    Your question was:

    I am 69 yrs old UK expat resident in Spain for the last 7 years. I own a villa which is worth anywhere between 300K and 350k in value. I married a young Chinese lady 2 years ago and she has been resident in Spain for that time too. I wish to leave my villa to my wife upon my demise but am worried about her potential exposure to IHT. Currently the property is owned 100% by me.

    We live in the Valencia region. Can you please advise me on the total tax amount she is currently exposed to?

    Our answer is:

    In you and your wife are Spanish TAX residents, and you are living, and paying, your taxes in Spain, as any other Spaniard, then, living in the Valencia region, IHT from your wife will be 1-3 % (including expenses of notary, land registry, etc), as maximum. This is because, the Valencian IHT will give more than the 95 % exemption on this tax for residents in Valencia Region.

    The problem is the term “resident”. We are not considering to have a “Residence certification” or “Residence Card”. And, not talking about to have the “Padron”. We are talking about to pay the Spanish Income Tax (IRPF) as Spanish every year (model 100).

    Please, check if both of you are declaring, and paying, every year, the Spanish Income Tax through the model 100. If it is the case, both of you will be considered as Spanish TAX residents, and you will get the exemption as explained above.

    Please, do not hesitate to contact us for more information.

    TLACORP

  4. Clive Walley

    Dear Sirs,

    We are most grateful to you for your reply and the time taken over our concerns. It is as great relief I can assure you to learn that there is only a nominal amount for her to pay in the event of my demise. I am not sure if you mean 1.3% or 1 – 3%? Perhaps if you have a moment to spare you would be kind enough to clarify this point. I have been registered, declaring and whenever appropriate paying Spanish tax for 4 years. My wife is about to make her first tax return although she has had no income to actually pay tax on yet. Presumably as long as she declares that is ok?

    Thank you so much for your great kindness.

    Kindest Regards

  5. admin

    Dear Sir,

    Thank you for your email. Please, note that the taxes, and expenses are from 1% to 3 %.

    The way in which you describe your tax situation as Spanish resident is OK. Just follow in this way, and in the future, if laws are the same as per now, your wife will be paying 3 % as maximum on IHT.

    Yours faithfully,

  6. admin

    Sorry, I forgot to mention that, although your wife does not have any income, it is recommendable to make, anyway, the Spanish Tax declaration. Just to say she is not receiving any incomes. The most important is making the yearly declaration to be considered as Spanish Tax residents.

    With kindest regards,

  7. Clive Walley

    Hi again and thanks for both your emails.

    Yes, that is how I read it about my wife making a tax return regardless of no income. Thank you for also clarifying the tax figure.

    Once again, our heartfelt thanks for your help!!

    Kindest Regards

  8. christine Smith

    The above sounds like good advice & I would like to say it is good to see simple good advice given on the net without strings! My husband & I have a property & are both tax residents in the present climate I think the value (is it calculated as Market value?) is around 2 thousand euros.We have made spanish wills . So am i right in understanding that each would be liable for 1-3% on 100,000.? Is it possible to e mail teh answer to me . Thanks you

  9. admin

    Dear Madam,

    We are contacting you answering to your query placed in our web site spansihsolicitors.com.

    First of all, let me thank you for your confidence in our company and services.

    In relation to your query, let me confirm you that the reduction in Valencia region for IHT will be effective if the testator and the inheritors are Spanish residents, and Spanish Tax Residents.

    How demonstrate if resident in Spain?: Presenting the following documents, between others:

    – Spanish Tax declarations (model 100) from previous years.
    – Padron from Town Hall
    – Others: Sometimes electric and water bills showing the consumption, and others.
    – Sometimes is required also Witness (area neighbors or friends) to confirm this point.

    Usually, providing this information, Spanish notaries and institutions considers inheritors as Spanish residents.

    Hope it helps.

    Thanking you again for your very much appreciated confidence in our company and services.

    With kindest regards,

    TLACORP

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