Ways on How to Avoid Inheritance Tax on Spanish Property

Lawbird Legal Services
22nd of June 2005

Unbeknownst to most property owners, Inheritance Tax (IHT) is an added potential grievance for many inheritors who have lost their loves ones. Although largely criticized and unpopular due to its negative effect on the capacity and desire to save, it is there and it has to be dealt with.

When does inheritance tax become a problem?

Spanish laws differ between regional community, but there is a main legal body which governs the application of tax (Ley de Impuesto de Sucesiones – Inheritance Tax Act) and a number of specific deductions depending on where the inheritors are residents for tax purposes and their age (pursuant to 21/2001 Fiscal and Administrative Measures Act).

Basically, IHT is calculated on the basis of a number of variables, namely value of assets being transferred, family relationship between giver and receiver and pre-existing wealth of the latter. Deductions are based on the age and residency for tax purposes status of the inheritors, on the consideration of habitual domicile of the property inherited (between spouses) and also miscellaneous expenses (funeral etc.).

In order to simplify matters we have created an IHT calculator to enable you to know your liability as of now, and on the following paragraphs we explain who best to avoid it. Keep in mind that IHT can go up, in specific situations, to 81% of the value of the estate!

What do we propose then?

Depending on several factors, it is of paramount importance to find a legal method to minimise IHT with as little cost as possible thus making it worth the while. We will set forth a number of options, indicating costs of inheritance in normal circumstances versus cost of alternative propositions, whether they are arranged before completing or after. In all cases, there is a presupposition that elders pass away before and we therefore presume that their inheritors will survive them.

Option 1: Buying jointly with future inheritors

This option has the advantage that it does not require any special arrangements to be in place prior to completing, making it a straight purchase, and IHT is reduced in the proportion of the ownership share.

Disadvantages: If the inheritors do not have enough financial means to prove their capacity to purchase the property the Spanish Tax Authority could raise a tax bill in concept of gift, which can be higher than the IHT we are trying to avoid. This situation, albeit unlikely, can be avoided by transferring the funds to the inheritors in the UK to make it subject to UK tax laws and availing therefore from the deductions therein envisaged.

Another disadvantage is of another nature: does everyone wish to have their properties in their children’s name, losing control of it? Even though this is not strictly a legal issue the concerns raised can be addressed by operating a variation of this option: splitting ownership into bare ownership and life interest. This sub-option enables the real owners to retain an interest during their life as if the property was fully owned by them. It can be used, rented out and even modified, but not sold. The bare owners can only use it with the permission of the beneficiaries of the life interest, and on death of the formers the inheritance will be calculated depending on a scale.

Costs: No additional costs.

Savings on IHT: The reduction on IHT can be calculated by using IHT calculator with the value of the property share left. If ownership is split between the person wishing to mitigate IHT and potential inheritors, a table is used to calculate IHT on the value of the residual value ownership.

Option 2: Selling the Property to Future Inheritors

If the property is already owned directly by the person wishing to mitigate IHT, they can sell the property to the potential inheritors, either fully or partly.

Disadvantages: Same as in Option 1.

Costs: 7% Transfer Tax on the value of the share transferred, and 35% Capital Gains Tax, if a profit is declared on the deeds. In any event, 5% of the share value sold will have to be lodged with the tax office on account of Cgt, but can be claimed back if there is not profit.

Savings on IHT: The reduction on IHT can be calculated by using IHT calculator with the value of the property share left. If 100% of the property value is transferred no IHT is applicable.

Option 3: Taking out a mortgage loan on the property

This option is interesting in that it allows a reduction on the value of the property for tax purposes, mitigating the liability accordingly. Such an operation requires that the equity released from the property is placed in some form of tax haven in order to avoid it being taxed.

Disadvantages: It does not fully mitigate IHT liability as most banks will only lend up to 70% of the property valuation, but it can be combined with other options. Also, this option requires that the property owners are not over a certain age (65-70 years is considered the maximum age limit to be eligible for a loan) and is subject to the vagaries of individual life expectancy, as an optimal IHT mitigation requires the loan to be fully owed when death occurs (it would be necessary to top up the loan amount every year and this may not always be possible, especially after a certain age).

Costs: Approximately 3% of the equity released.

Savings on IHT: Up to 70% (amount of the mortgage not yet repaid)

Option 4: Buying or owning through a Spanish Limited Company

This is becoming a very attractive form of minimising the effects of IHT if certain steps are taken. By virtue of article 108 of the LMV (Ley de Mercados de Valores) Act, company shares can be transferred with no transfer tax associated to it provided that none of the acquirers take control of the company (no more than 50% of the shares) and that one year has passed from the act of incorporation of the company or the transfer of the property to the company if this happens after the act of incorporation.

Many property owners are availing of this structure to avoid IHT by effecting the sale of the shares to their inheritors before death. Such a sale is not susceptible of being taxed as a gift. If more anonymity is required, the sale of the shares can take place via a UK Notary Public, and further legalised with the Hague Apostille.

Disadvantages: Company running costs of aproximately 2,400 € yearly.

Costs: Incorporation of company: 1,500 Euros.
If the property is already owned by the person wishing to mitigate IHT, Transfer tax at 1% of the share of the value of the property transferred to the company is applicable.

Savings on IHT: 100%

Option 5: Buying or owning through a EU company.

This option is also interesting in that the transfer of the shares after death takes place in the country where the company is domiciled, thus preventing the Spanish authorities from obtaining this information.

IHT may be, however, an issue in the country where the company is domiciled and therefore it will be necessary to clarify the tax position in the country.

Disadvantages: Regard will have to be given to the tax position on the country of residency in order to establish IHT liability there.

Costs: Cost of incorporation of company: Depending on jurisdiction and provider of the service. If the property is already owned by the person wishing to mitigate IHT, Transfer tax at 1% of the share of the value of the property transferred to the company is applicable.

Savings on IHT: 100%

If you would like to implement any of the above structures, or would like further advice on how to mitigate Inheritance Tax, please contact us using our Contact Form.

Discuss this Article

DAVID THOMAS Says:

Fri, Dec 26th 2008, 10:28
Hi, what are the costs be to avoid Spainish IHT in the UK? of forming a company? etc. Dave
Lawbird Lawyer Says:

Mon, Dec 29th 2008, 11:43
Dear Sir, The reply to your queries are in the article you quote. However, I must point out that article is from 2005 and changes in the laws have been passed which change the advice given within. e.g. regarding holding companies the taxation has changed making them a less attractive option.
liz hagerty Says:

Wed, Jan 21st 2009, 13:02
Is there less tax to pay in the UK? If so can an English will override a Spanish one?
Malcroach Says:

Mon, Feb 16th 2009, 12:48
David ,The costs of forming a UK company translating, Notorising and Apostile of the Documents, obtaining a CIF number for the company in Spain ,all Legal fees and Notary fees in Spain in connection with gifting the property to the company ,IVA/VAT would be £5000 all in less than the cost of 1 persons probate in Spain
Vanessa Deakin Says:

Wed, Feb 25th 2009, 15:32
Could you please advise me on the costs of setting up an EU company for my property in Majorca? Thanks, Vanessa
Doug Says:

Wed, Jul 8th 2009, 11:42
My wife and I jointly own a property on the Costa Del Sol, Spain, worth about 600,000 - 700,000 euros. We are both residents. Would the formation of a UK or Spanish Limited Company avoid paying Spanish IHT if either of us died. We have a Spanish will, naming our two daughters in the UK as beneficiaries. Can you give us any idea of the cost? Thank you
aflores Says:

Thu, Jul 9th 2009, 14:20
Hi Doug. I do see why you would be interested in setting up a structure with a view to reducing your exposure to IHT, given the small mortgage on the property. A calculation based on the figures and the number of inheritors (2) shows a tax liability of around 40k Euros per inheritor in the current scenario (700K Euros value of property and 80k Euros mortgage). You are able to form an UK company or alternatively a Spanish company (SL) and transfer the property into it, which although would not eliminate the exposure it would however allow you to deal with it in a more effective manner. The associated costs would be as follows, in the case of a Spanish Limited Liability Company: Company incorporation costs: 1800 Euros Stamp Duty: 7.000 Euros (on a declared value of 700k Euros) Notary fees: 800 Euros (approx) Land registry fees: 700 Euros (approx) Change of utility contracts and Town Hall records: 250 Euros Registration of deeds fee: 250 Euros If you were to incorporate a UK limited company you would have the same costs as above except for the incorporation costs which presumably would be significantly lower. Should you have further queries do not hesitate to contact me.
Malcroach Says:

Sat, Jul 11th 2009, 14:19
Doug The cost of the whole transaction of investing your property into a UK Company including Notary fees in the UK and Spain are £5000 This includes company formation ,and obtaining a CIF number for the company also the setting up of a Company bank account and transferring all the property bills into the UK company . There will be Plus Valia tax to pay ,land register fees and 1% regional tax. When done the company does not pay any taxes in Spain , No IHT in Spain and no IHT in the UK for you or your Spouse .The company can claim tax relief in the UK on all attributable expenses including mortgage interest, running costs are £575 per year The transfer takes maximum 4 weeks, review www.winchamiht for more info. You don not need a Spanish Will if you have a UK one ,all that is required is a death certificate and a grant of probate from the UK translated notarised and apostiled , remember a UK Will can be varied within 2 years from death and this means that the asset could be left to a UK Company that will not pay IHT in Spain, A Spanish will can not be varied. A UK company is the only sensible method of removing Spanish taxes with no risks and at a low cost.
Dee Says:

Mon, Sep 21st 2009, 20:59
Need some advice due to death of my mother, jointly own a property with my sister and mum, there is a spanish will
Lawbird Lawyer Says:

Tue, Sep 22nd 2009, 09:23
Dear Dee, Please contact us on your matter. Yours faithfully,
Eddie Says:

Sat, Sep 26th 2009, 19:24
Hi, My wife and I own a property in the Balearics worth approx 350,000Euros. I am 64 and my wife is 57. We have had this property for 22 years. We have a Spanish will and our two sons are the beneficiaries. Can I gift the property to our two sons now to avoid Inheritance Tax in Spain and in the UK. Thank you.
Lawbird Lawyer Says:

Mon, Sep 28th 2009, 11:43
Dear Eddie, Spanish IHT has been almost supressed in the Balearic Islands. In Spain IHT is called really Impuesto de Sucesiones y Donaciones (ISD)which can be translated for Inheritance and Gift Tax. Gift tax has also been considerably reduced in the Balearic Islands. Please read our article on the matter: Spanish Inheritance Tax: Advantages of Making a Will in Spain - 3rd of September 2009 I quote an excerpt: "There’s an ongoing trend to abolish Spanish inheritance tax (much like there was for Wealth tax which was abolished last year) fostered by Spain’s conservative party. These trends are always very popular amongst voters. Many regional communities have jumped onto the band wagon and are now applying reductions on IHT to such an extent which in practice translates to almost suppressing it, i.e. Madrid, Basque Country, Navarre, Valencia, Balearic and Canary Islands." Regarding the HMRC's IHT liability I suggest you seek advice from a UK solicitor as I'm not qualified to advice on the matter. I can recommend you UK law firms if you wish. In any case the thereshhold in the UK is very ample unlike in Spain. From the Spanish legal point of view the IHT tax liability of both your heirs (your two children presumably) would be very low if not nil. I find it futile that you gift them the property. If you want a tailored IHT report on your particular case so you can rest assure, please contact us for a quote on the fees for this legal service. Yours faithfully, Raymundo Larraín Nesbitt
Unregistered Says:

Thu, Nov 19th 2009, 21:46
"There’s an ongoing trend to abolish Spanish inheritance tax (much like there was for Wealth tax which was abolished last year) fostered by Spain’s conservative party. These trends are always very popular amongst voters. Many regional communities have jumped onto the band wagon and are now applying reductions on IHT to such an extent which in practice translates to almost suppressing it, i.e. Madrid, Basque Country, Navarre, Valencia, Balearic and Canary Islands." Can you tell me the current IHT rules in Tenerife please? My scenario is that my partner and I (not married) would be purchasing a home in Tenerife. Eventually we would want the property left to my two daughters. They are not related to my partner. Should we leave the first deceased partner's share of the property to the surviving partner, which would then pass to my two daughters with the death of the last partner? Does this cause extra tax if I were to die first, as my partner would then own 100% which he would leave to my daughters, who are not related to him? OR each leave our half share to my daughters, with a life interest for the surviving partner in the property? I'd welcome your input on this.
Unregistered Says:

Thu, Nov 19th 2009, 21:50
Sorry, to continue from above... My partner and I may be resident in Tenerife, but not sure about this, and this situation may change when one of us dies. The other may want to return to the UK. Does being resident/non-resident have any effect? My two daughters will be resident in the UK. Thanks
Ellie Says:

Tue, Jan 19th 2010, 22:38
With regard to once married, then divorced and now reunited without marriage, how is the iht possition for us in Spain?
Lawbird Lawyer Says:

Wed, Jan 20th 2010, 10:17
Dear Madam, I believe in Tenerife you have to be resident and have lived there for the prior 5 years to take benefit of a regional IHT exemption of 99,99% in the taxable base, meaning almost no IHT tax is paid. However you still have the national law which has a tax exemption of 95% on the taxable base of the main primary dwelling (residence) which requires less years than the above regional allowance. If you are not married and are not registered as a couple either you will be whammed with IHT as you are deemed to be non-relatives (friends) or Group IV. Please read my article for more details: Spanish Inheritance Tax: Advantages of Making a Will in Spain - 3rd September 2009 Quoting an excerpt: Spanish IHT most onerous cases are related to the transfer of large estates or assets bequeathed to distant relatives or non-family members such as friends (Group IV). Group 4: Relatives in fourth degree, or withourt any relationship, for example, a friend. Nought. Yours faithfully, Raymundo Larraín Nesbitt
tony Says:

Thu, Jan 28th 2010, 00:06
I have a UK will bearing my names as beneficiary of fund lodged with a Spanish financial institution by my late grandmother. Is there any tax to be paid before I can have the money?
Lawbird Lawyer Says:

Thu, Jan 28th 2010, 09:22
Dear Sir, On what date did your grandmother pass away? Yours faithfully,
bill Says:

Thu, Jan 28th 2010, 14:23
can you advise on fully paid property left in spain to ex wife worth around 50,000euro how much tax will have to be paid he only lived in spain one year also the cost of tranferring bank accounts into her name
Lawbird Lawyer Says:

Mon, Feb 1st 2010, 11:36
Dear Sir, Regrettably we do not offer as a free query calculating IHT liability. You would need to hire us to assess your particular case. Yours faithfully,
Pali Says:

Mon, Mar 8th 2010, 06:05
Hi, have just found out that my uncle passed away and has left us a property in Madrid. (there are four nieces and nephews and all live in Australia). I need to know the process involved in acquiring the property and if we do not wish to sell how can we reduce the inheritance tax. Thanks
Lawbird Lawyer Says:

Thu, Mar 11th 2010, 10:23
Dear Sir or Madam, Strategies to mitigate exposure to Spain's overrated IHT are carried our generally prior to buying the property or else placing a mortgage against it once purchased as explained in my article below. Incidentally, the Spanish Tax Office does not always accept the latter as it -often correctly- deems that placing charges on the property has been done with the sole purpose of tax avoidance. You cannot really do much to reduce your IHT bill after the testator has passed away. As you are all residents outside Spain you cannot take advantage of regional tax allowances either. You would only be entitled to the national tax allowance dependant on which of the four groups the beneficiaries are classified in: Spanish Inheritance Tax: How much is it? - 1st February 2000 I take the opportunity to offer you our legal services should you be interested (please click on the blue link): Estate Transfer to Heirs This service is intended for those who are inheriting the Spanish assets of a deceased person, whether as the legal heir to an estate or by means of a Will. As from the 1st January 2010 our legal fees for this service have been lowered to 3,000€ plus 16% VAT. Payment in installments is available upon request subject to an initial downpayment. The estate transfer to heirs service includes: • Requesting of copies of the Death Certificate, in the event that the death took place in Spain. • Requesting of a Will Certificate information and location from the Central Registry of Wills in Madrid. • Obtaining of the Will from the Notary Public where it was signed / Estate Heirs Statement (in those cases where there is no will) • Drafting and signing of the Deed of Inheritance Acceptance • Partition of the inheritance according to what the will states, or, where there is now will, to the desires of the inheritors. • Inscription at the Land Registry of the new owners of the Estate inherited. • Cadastral modification of new owner • Arrangement, calculating and payment of the applicable Spanish Inheritance Tax. • Arrangement, calculating and payment of the applicable Plusvalía Tax. Yours faithfully, Raymundo Larraín Nesbitt

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