15 Inheritance & Wills

2007 Buying Guide

The final consideration when you buy your home in Spain might be the position regarding inheritance law and inheritance tax. Inheritance law is governed by the law of the country of nationality of the deceased person.

Unfortunately, this position is complicated because UK law provides that for property matters, the law of the country where the property is situated should apply. However, for property situated in Spain, Spanish inheritance tax rules apply. So this is a very complicated area, made worse because there is no double tax treaty between the UK and Spain covering inheritance tax. You must take legal advice, more so as there is scope for tax planning here to reduce your liabilities.

What follows is a simplified explanation of the situation – but the interpretation of the rules could change at any time, and it is essential to take legal and taxation advice.

Inheritance Rules and Making a Will
In theory the position should be relatively simple: as stated above, UK inheritance law applies to a UK national who dies owning property in Spain. The complication is that UK inheritance law actually provides that the disposal of immovable property (land and buildings, household and personal goods) abroad is governed by the law of the country where the property is situated (other rules apply to other types of assets such as bank accounts and investments).

So UK law actually says that Spanish law should apply to Spanish property!

Nevertheless, Spanish law helps avoid any problems in the majority of cases by providing in Article 9 of the Spanish Civil Code that, when a foreign property owner dies, having made a will in either Spain or his country of nationality, even if he holds an official residence permit (residencia) in Spain, the disposal of any assets he owns in Spain will be governed by his own national law, not Spanish law.

If his own law permits free disposal of the assets, this frees him from the Spanish inheritance law [but not from Spanish inheritance tax]. To be valid in Spain a will has to be registered at the Spanish Registrar of Wills (Registro Central de Ultima Voluntad). When registering a will, a foreigner has to sign a declaration under Article 9 that his own national law is ruled by the principle of free disposal of property by testament (i.e. that in the UK you can dispose of your property as you wish in your will) and that there is no equivalent to the Spanish Law of Obligatory Heirs (Ley de Herederos Forzosos) in the UK.

This is the case in the UK for property situated in the UK, and as a result the Spanish Registrar of Wills (Registro Central de Ultima Voluntad) has so far accepted this declaration for UK nationals.

Providing this interpretation does not change, there is in practice only one major difficulty. If a person who would have benefited under the Spanish Law of Obligatory Heirs (Ley de Herederos Forzosos) challenges in the Spanish courts a will of a UK national based on the Article 9 declaration providing for the free disposal of property, the Spanish courts will first look at the UK law, find that it applies Spanish law to the disposal of property, and so apply Spanish law –and a person who would have inherited under the Spanish Law of Obligatory Heirs will therefore have his challenge upheld.

If therefore there is any possibility that you might make a will, which disposes of your Spanish property in a way, which could be challenged, it is definitely necessary to consult a lawyer with specialist expertise in this area.

If a foreign owner of property in Spain dies without making a will, whether resident or not, there is no dispute: his property will be disposed of in accordance with Spanish inheritance rules. But, as in the UK, to administer an estate where the person has not made a will takes more time, trouble and money, so you should make a will to deal with your Spanish assets.

In case you fall into one of the areas where Spanish law may be involved, we have provided a brief summary of the Spanish inheritance rules in the Annex at the end of this Guide.

If you are happy to proceed with a will providing for free disposal of your Spanish property, it may at first sight seem easier if this will was made in the UK. But there are some problems with this, and we have summarised these in Annex 2.

Inheritance Tax
Inheritance Tax is governed by the 1988 Ley del Impuesto sobre Sucesiones y Donaciones (Inheritance Tax Law). This provides that non-residents who own property or rights in Spain, of whatever nature, are automatically subject to inheritance tax. It also creates some important exemptions, which reduce the tax for smaller inheritances, and “multiplication coefficients” which increase it for larger inheritances, and for inheritances received by non-relatives or wealthy inheritors.

This makes it a very complex subject, as the tax not only depends on the value of the estate, but on the wealth of the recipient.

In general, the taxation of inheritances for non-residents follows the same rules as for residents: in the valuation of property, the availability of allowances and charges or costs which may be deducted, the ability to accumulate transfers previously made, reductions in the tax base for “hereditary acquisitions” (adquisiciones hereditarias), and provisions for the authorities to check the values, and determine the tax due.

For inheritance tax purposes, property is valued at the higher of the market price, valor catastral, or the value set by Hacienda for wealth tax purposes. In most cases it will be today’s market value.

Since 1997, official residents leaving their Spanish property to a spouse or children have a 95% exemption in the tax base up to a maximum of €120,202. It is also available if the property is left to a sibling who is over 65 years of age and who has been living in the property for at least 2 years. This exemption is not available to non-residents. Also, it only applies to the family home, not to other assets. The inheritor must keep the property for at least 10 years, otherwise he will have to pay the tax which would have originally been due on the amount of the exemption. However this exemption will remove many inheritances from the scope of tax.

Remember also that in the case of a jointly owned property, where one owner dies, it is only half the value, which is included in the estate. The tax base is then further reduced by any debts owing by the deceased, mortgages, and the expenses of the last illness and the funeral costs.

The rules for calculating the amount of inheritance tax due are very complicated, and depend largely on the value of the estate and a “multiplication coefficient” (coeficiente multiplicador), and in addition have changed considerably in recent years. Here we provide, purely for illustration purposes, a very simplified overview, based on the law and tax rates applicable in 1999. As these may have changed, it is important that you take professional advice in all cases.

Having first applied the above exemption and deductions, the first €15,965 in the hands of each adult inheriting relative is exempt from tax. Inheriting relatives under the age of 13 receive an exemption of €47,858. Between the ages of 13 and 21, there is a sliding scale of €3,990 a year. So an inheritor aged 20 receives an exemption of €19,947. This exemption applies to direct relations – parents, spouses, children and siblings. The exemption is halved for uncles, cousins and nephews. For more distant relatives, or non-relations, there is no exemption.

To illustrate this, let’s assume that you are a resident, your only asset in Spain is your home, and this is worth, say, €300,506, and is in joint names and will be left to your spouse and, say, two adult children:

01 Only €150,253, half the value owned by each owner would go into the estate;
02 €120,202 is exempt, leaving only €30,050, or €9,976 taxable;
03 As each inheritor has an exemption of €15,956 they pay no tax.

So for most small and medium sized inheritances (the €300,506 in this example is around £200,000) there will be very little tax to pay.

But if the inheritance is larger, or if it is received by non-relatives or wealthy people, the situation becomes more complicated and expensive – we have provided a summary of the situation and an illustrative example in Annex 3.

So far as the UK tax position is concerned, if you are domiciled in the UK (which as explained above, most people will be, unless they have severed all links with the UK and made Spain their permanent home with no intention of ever returning to the UK), you will be liable to UK inheritance tax on your world-wide assets.

There is no double tax treaty with Spain for inheritance tax, but the Inland Revenue currently grants “unilateral relief” against your UK tax liability of an amount up to the amount paid in Spain. If the tax charged in Spain is more than that due under UK tax the relief is limited to the amount of the UK tax.

If you are concerned about inheritance tax implications in the UK, the Capital Taxes Office operates a helpline on 0115-974-2400, or you can order booklet IHT18 on inheritance tax aspects for non-residents on 0115-974-2982, or fax your request to 0845-234-1010.

Annex 1: Spanish Inheritance Rules
Spanish law provides rules for inheritance (known as the Law of Obligatory Heirs or “Forced Inheritance Rules”- Ley de Herederos Forzosos,).

The following explanation is based on the law in force in 1999, and is provided solely for illustration. The law may change so you should not therefore rely on its accuracy (please refer to the disclaimer the legal notice in the site). If you are concerned about inheritance matters, you must take specialised legal advice. The law provides that a spouse keeps half of all property acquired during marriage, so if the property is owned jointly, it is only half which goes into the estate. The law then provides that, in dealing with the property in the estate:

01 A spouse is entitled to a life interest (usufructo vitalicio) in one-third, but ownership of this third must be willed to surviving children - the testator (the person making the will) can choose how this is divided, and the children do not inherit outright until the spouse dies;
02 Outright ownership of another one-third must go to the surviving children in equal shares; and

03 The remaining one-third can be disposed of freely.

04 If there are no children, then surviving parents have a right to one-third if there is a surviving spouse, and one-half if not.

So for a married couple with children, if we assume that one spouse would probably want to will as much as possible to their partner, the best achievable situation would be:

01 A spouse would keep his/her own 50%;
02 They could then inherit one-third of the other half under free disposal;
03 They would have a life tenancy in another third of the other half.

That means that ownership of only one-third of one-half (i.e. one-sixth or 16.6% of the total) need actually pass directly to children. So if this suits your intentions, you have no problem and you can go ahead and make a Spanish will in accordance with the Law of Obligatory Heirs. Other clauses can be written into a Spanish will to further help the position of the spouse.
Practical aspects
There are specific rules governing the contents and form of a will in Spain, so you must see your lawyer to prepare this. The will must be drawn up in two columns, one in Spanish and the other in English.

It must then be notarised, when it becomes known as a testamento abierto (an open will), which is the usual form. The notary keeps the original, gives the testator an authorised copy, and registers it at the Registro Central de Ultima Voluntad. If you wish to keep the provisions of your will secret, it is possible to make a testamento cerrado (closed will).

Finally, do make sure that your Spanish will deals only with your real property in Spain, and that your “foreign” will expressly excludes this.

Other points
Spanish law also states that any foreigner officially resident in Spain is subject to Spanish inheritance law on his worldwide estate. But again in practice, the authorities do not ask whether the testator is an official resident or not.

They accept as valid the Spanish will disposing of only the Spanish property. The only requirement is the payment of Spanish inheritance tax on assets located in Spain.

Annex 2 Why you should not dispose of your Spanish property through your UK will
So if you are happy to proceed with a will providing for free disposal of your Spanish property, it may at first sight seem easier if this will was made in the UK. But there are several problems with this.

First of all, you can only make a UK will if you are still regarded as officially domiciled in the UK. Domicile is usually very difficult to change, so this should normally not be a problem. But a person who has lived for most of their life in Spain, has severed all ties with the UK, has no assets or income in the UK, has truly made Spain their permanent and only home, and has no plans to return to the UK in old age, is likely to be regarded as domiciled in Spain, and may have a problem in making a valid UK will.

But “domicile” is a general law concept, so is not strictly defined, and this is certainly an area which needs specialist legal advice.
Second, in order to legalise a UK will for Spain and be able to execute it (to be able to transfer the property ownership, make a new escritura, register the change, and eventually sell it), there are several steps that must be taken:

01 A certified copy of the grant of probate must be legalised by the Spanish Consul in the UK.
02 A Spanish translation of this certified copy must be prepared and validated by the Spanish Consul in the UK.
03 A Spanish lawyer must be empowered to prepare a list of the assets in Spain, and to execute the will, and pay inheritance taxes.
04 The Spanish Consul must prepare a certificado de ley (certificate of legal compliance), which confirms that the testator had the legal capacity to make a will; that the will is valid; that the Spanish Law of Obligatory Heirs does not exist in the UK; that the will has been duly proven; and that the trustees named have the legal powers to administer the estate. It declares your will effective to be executed in Spain, and authorises your lawyer to carry this out.

Annex 3: Calculation of Spanish Inheritance Tax
The following information and examples are based on the law in force in 1999, and are provided solely for illustration. The law may change so you should not therefore rely on its accuracy (please refer to the disclaimer the legal notice in the site). If you are concerned about inheritance matters, you must take specialised legal advice.

The rates are generally on a sliding scale ranging from 7.65% to 34%. As a rough guide, the tax due on an inheritance – after allowing for all the exemptions and deductions is likely to be as follows:

on €30,050 is approximately €2,854 (9.5%);
on €60,101 is approximately €6,010 (10%);
on €120,202 is approximately €15,025 (12.5%);
on €150,253 is approximately € 21,035 (14%);
on €240,404 is approximately €39,065 (16.25%) and;
on €601,012 is approximately €150,253 (25%).

Where the property is left to distant relatives or non-relatives, the tax is a flat rate of 18%. Where a single person dies childless and the estate is left to a non-relative, it is a flat rate of 22.95%.

However, these rates are increased by a series of “multiplication coefficients” to allow for the closeness of the inheritor’s relationship to the deceased, and for the inheritor’s existing wealth (in Spain). For spouses and children inheriting, where existing wealth does not exceed €402,678 there is no increase.

If a spouse or child already owns more than €4,020,770 the tax is increased by a factor of 1.2. For cousins and uncles, the factors range from 1.5882 if their existing wealth does not exceed €402,678 to 1.9059 if it exceeds €4,020,770. For non-relatives, they are 2.0 and 2.4 respectively.

You can also do some tax planning by taking a mortgage to reduce the net value of the estate in Spain, and by transferring some of the ownership now, or by transferring the property into a trust company registered in Spain or another EU country (but not in offshore centre).

That is all fairly complicated, and it is true that inheritance tax can be very high. If you are likely to be badly affected by inheritance tax, it may be worth considering buying the property in the name of a trust company (but not based offshore!), or “selling” the property to your heirs. This will cost you around 10% in transfer taxes, but this could be less than the inheritance tax in some circumstances. It is again an area where you need expert legal advice and the compilation team on this Guide are aware of taxation expertise in the UK, Spain and Switzerland.

NB
The Euro allowances and other taxation figures are taken from the original Spanish legislation that in many instances pre-dated the country's switch from pesatas to Euros.

Thanks
St James's Place Partnership, Caja Duero, SolBank, Javier de Juan Spanish Solicitors, Guy Harrop Photography

Impressions
First published online January 2003 by Property in Spain.
Revised in December 2003, October 2004