Spanish Inheritance Tax

Pellicer&Heredia expert in inheritance tax laws in Spain

The Spanish inheritance tax is a tax on the goods of someone who has passed away, just like in many other countries. This tax includes property, money and any other kind of assets.

The amount owed depends on several factors, including the value of the estate, the relationship between the heir and the deceased, and the region in which the property is located, as tax laws vary across Spain’s autonomous communities. Inheritance tax in Spain can be a complex issue, especially for non-residents and expatriates.

Our team of international inheritance and wills specialists provides personalized advice to ensure your estate planning is efficient and compliant with Spanish law. At Pellicer&Heredia, we guide you through the intricacies of inheritance tax, helping you understand the rates, exemptions, and legal implications.

What is inheritance tax in Spain?

Inheritance tax in Spain, known as Impuesto sobre Sucesiones y Donaciones (ISD), is a tax applied on assets transferred to heirs upon someone’s death. This tax is levied on both residents and non-residents, but the scope of taxation differs.

Spanish residents are required to pay tax on worldwide assets, while non-residents are taxed only on the assets located in Spain. Each autonomous community in Spain can modify tax rates and allowances, making it essential to consider regional variations when determining the final tax burden.

Inheritance tax is calculated based on the value of the assets inherited, and it includes not just cash and real estate but also other assets such as investments or businesses. The rate is progressive, meaning the higher the value of the inheritance, the higher the tax rate applied. Additionally, the tax is personalized to the heir’s circumstances, considering factors like the heir’s relationship to the deceased and their wealth.

When do I have to pay Spanish inheritance tax?

Inheritance tax in Spain must be paid within six months from the date of the deceased’s death. However, if more time is needed, you can request a six-month extension within the first five months. If the tax is not paid on time and no extension is requested, penalties and interest may apply. It’s important to consult with Pellicer&Heredia legal advisor to ensure compliance with deadlines and minimize any financial impact.

How much is the Spanish inheritance tax?

Inheritance tax in Spain is calculated based on the value of the total assets the heir inherits. These taxable assets include a wide range of items such as real estate, bank accounts, investments, shares, vehicles, and personal belongings like jewelry, art, or valuable collections. Any existing debts or mortgages linked to these assets can potentially reduce the taxable base, but the extent of deductions depends on Spanish tax law. It’s essential to assess all assets carefully to determine the exact taxable amount.

Tax rates and thresholds

Spain follows a progressive tax system for inheritance, where the percentage owed increases with the value of the inheritance. In general, tax rates range from 7.65% for smaller inheritances to 34% for larger estates. However, these rates are not uniform across the country.

Spain’s autonomous communities have the authority to adjust tax rates, thresholds, and available deductions, meaning the final tax owed can vary significantly depending on the region where the deceased resided or where the assets are located. Some regions offer favorable tax reductions and exemptions, especially for close relatives.

Relationship to the deceased and its impact on tax rates

The relationship between the heir and the deceased plays a significant role in determining the tax rate. Close relatives, such as children, spouses, and parents, generally enjoy lower tax rates and are eligible for higher exemptions. More distant relatives or individuals who are not directly related, such as friends, are taxed at higher rates with fewer exemptions.

Autonomous communities also offer additional deductions for special circumstances, such as the heir’s age, health, or disability, which can further impact the amount of tax payable.

Spanish inheritance tax variations by region

In Spain, each autonomous community has the power to modify inheritance tax laws, which can lead to significant regional variations. While national regulations provide a base structure, communities can adjust tax rates, allowances, and deductions. In regions like Madrid, for example, substantial reductions are offered, resulting in minimal tax for close relatives. By contrast, other regions apply more stringent tax policies.

Understanding these differences is crucial as where the deceased lived or where the assets are located will influence how much tax you will owe.

Impact of regional allowances and deductions

In Comunidad Valenciana, inheritance tax laws offer some reductions, but they can be more restrictive compared to other regions like Madrid or Andalusia.

Heirs who are close relatives (Group I and II heirs: spouses, children, and parents) benefit from significant deductions, which can lower the tax burden. For example, direct descendants under the age of 21 are entitled to a tax-free allowance, and spouses may also receive reductions based on the value of the estate. However, allowances may decrease for more distant relatives, and large estates may still incur considerable tax.

In Comunidad Valenciana, additional allowances are available for heirs with disabilities and for inheritances that include the primary residence of the deceased. These specific deductions, along with regional adjustments to tax brackets, can help reduce the total tax amount owed.

It’s important to review regional laws regularly, as they are subject to change and can have a significant impact on estate planning.

Inheritance Tax Planning in Spain

Tax reductions and exemptions for inheritance in Spain

Spain, like most of Europe, has serious financial problems and, consequently, the state is having to introduce new policies and taxes to help balance the deficit, including the Spanish Inheritance Tax.

Before the change, which came into effect on August 6, 2013, published Decree-Law 4/2013, of August 2, in Spain, it was possible to apply allowances of up to 99%. This has now been reduced to 50%, which would be applicable only to certain relatives. These tax-free allowances depend on the relationship of the beneficiary with the testator, or even the constitution of the assets.

Group 1. Children under 21 years old: you can apply an allowance of €47,859. This includes adopted children.
Group 2. Children older than 21 years, grandchildren, spouse, and parents or grandparents: you can apply an allowance of €15,957. This includes adopted children.
Group 3. Siblings, aunts and uncles, nieces and nephews, in-laws and their ascendants/descendants: you can apply an allowance of €7,993.
Group 4. Cousins, all other relatives, unmarried partners and those unrelated: No allowance can be applied to your assets.

Besides this group classification, there are also other allowances for the Spanish Inheritance Tax, such as the reduction of 100,000 euros on the Spanish Inheritance Tax for children and spouse, which could even increase up to 156,000 euros for those under 26 years old. Finally, there is another reduction if inheriting the main residence property of the testator and the inheritor does not sell within 5 years.

However, the actual financial base figure has increased and so the actual final allowances are calculated using a number of complicated factors relating to the relationship to deceased, age, residency etc. Also, in Spain, there is not a fixed inheritance tax percentage to be applied to the estate. The tax is calculated on a sliding scale.

Now is a good time to review your financial and taxes planning, get information from professionals, and this naturally goes hand-in-hand with making wills.

Example of using each spouse’s nil rate band

Peter and Elizabeth have equalized their estates with each holding £350,000 under their sole names. Peter dies leaving £300,000 to the children and the rest to his wife. No tax is payable under Peter’s death as the gift to the children falls within Peter’s nil rate band and the gift of residue is spouse exempt.

Disclaimer: This article does not pretend to be totally comprehensive of all the potential cases and it is only for information purposes. We recommend taking professional advice and information to guarantee that you have planned in advance any tax liability, in Spain or in the UK.

Spanish inheritance tax for non-residents

Non-residents who inherit assets in Spain are subject to inheritance tax on any assets located within the country, such as real estate, bank accounts, or investments. Tax rates for non-residents are generally aligned with those for residents, but non-residents may face more limited deductions and exemptions. In some cases, non-residents may face higher tax rates depending on their relationship to the deceased, with fewer regional reductions available.

In practice, the calculation of inheritance tax for non-residents depends on the value of the assets, the type of property, and the legal relationship between the heir and the deceased. It’s important to note that non-resident heirs may have to navigate additional administrative procedures, including filing tax returns with the Spanish tax authorities. At Pellicer&Heredia can help non-residents understand their obligations and optimize their tax liabilities when inheriting assets in Spain.

Changes in the inheritance and donation tax for foreign residents

Non-EU residents, historically taxed under general state regulations for inheritance tax in Spain, faced higher costs compared to EU residents who benefited from regional allowances. This created an unfair and disproportionate financial burden, unlike EU residents who could take advantage of discounts and exemptions.

A 2014 ruling by the European Court of Justice extended regional tax benefits to EU residents, but non-EU residents were still excluded. However, in February 2021, Spain’s Supreme Court ruled in favor of a Canadian resident, recognizing the right of non-EU residents to benefit from regional inheritance tax reductions.

This landmark ruling aligned with previous European Court decisions, which held that treating non-EU residents differently violated community law. Specifically, the decision was influenced by a 2013 case involving a Swiss resident who challenged Germany’s unequal tax treatment of non-EU heirs.

The Canadian appellant argued that this discriminatory tax treatment violated the principle of free capital movement and equality under Spain’s Constitution. The Spanish court agreed, ordering the government to refund the excess tax paid. This ruling marks significant progress in ending discriminatory tax practices for non-EU residents.

Double taxation treaties and their effect

Spain has signed double taxation treaties with many countries to prevent heirs from being taxed twice on the same inheritance, particularly when the heir is based outside of Spain. For instance, treaties with countries such as the UK, the United States, and most EU countries allow non-resident heirs to offset inheritance taxes paid abroad against the amount owed in Spain. These treaties are designed to avoid a situation where an heir pays inheritance tax both in Spain (where the assets are located) and in their home country (where the heir resides).

The specific terms of each treaty can vary significantly, affecting how much tax relief can be claimed. For example, an heir residing in a country with a double taxation treaty with Spain may receive a tax credit in their home country for the inheritance tax already paid in Spain. However, if a country does not have a treaty with Spain, the risk of double taxation increases, which could lead to higher overall tax liabilities. It is critical for non-resident heirs to consult with tax professionals familiar with international inheritance laws to ensure they benefit from any available tax relief and comply with the regulations of both countries.

How to avoid inheritance tax in Spain?

Avoiding or reducing inheritance tax in Spain requires careful planning and understanding of Spanish tax laws. Here are some strategies that can help minimize the tax burden:

Gifting assets during your lifetime: transferring assets to heirs before death can help lower the taxable value of your estate. Depending on the region, gifts may be taxed at lower rates than inheritances.
Utilizing regional allowances and deductions: Spain’s autonomous communities have different inheritance tax rules, with some offering generous allowances or even near-total exemptions for close relatives like spouses and children.
Life insurance policies: in some regions, life insurance payouts to heirs may benefit from favorable tax treatment or even exemptions, depending on the relationship between the policyholder and the beneficiary.
Setting up trusts or foreign entities: establishing trusts or other legal structures abroad may help minimize inheritance tax obligations, though this approach is complex and requires specialized legal advice.
Splitting inheritances among multiple beneficiaries: because inheritance tax in Spain is progressive, meaning higher tax rates apply to larger inheritances, dividing the estate among multiple beneficiaries can help lower the tax rate for each individual heir.
Estate planning and consulting experts: proper estate planning, with the help of legal and financial advisors, is key to reducing inheritance tax.

At Pellicer&Heredia professional legal and tax advice, you can ensure to comply with both Spanish and international regulations and that your estate plan is tax-efficient.

How to manage inheritance tax efficiently with Pellicer&Heredia

Proper estate planning is key to efficiently managing inheritance tax in Spain. By organizing your assets early, you can strategically reduce the taxable value of your estate and ensure that your heirs benefit from regional exemptions and deductions.

At Pellicer & Heredia, our expert lawyers specialize in helping clients develop estate plans tailored to their specific circumstances. We take into account the complexities of Spain’s inheritance tax laws and advise on the best ways to protect your assets and reduce tax liabilities for your heirs.

We offer personalized legal strategies and ensure you take full advantage of applicable deductions in your region.