Spanish inheritance tax issues relating to Spanish property
The decision as to how your Spanish property is bought is a huge one. Getting it wrong can cost tens of thousands of pounds because of Spanish inheritance tax on Spanish homes.
Inheritance tax on Spanish homes is calculated after a number of factors are taken into consideration. These include:
- The value of assets being transferred
- Relationship between deceased and heir
- Pre-existing wealth of the latter.
All this means Spanish inheritance tax can be as high as 80%. For this reason it is vital to minimise the risks of inheritance tax on Spanish homes and there are a number of options that allow you to legally do this.
Buying Spanish Property with future inheritors
This option would mean that Spanish inheritance tax is reduced in proportion to ownership share. However, this method is not without its drawbacks such as:
- A gift tax bill could be raised if inheritors cannot prove their ability to purchase the property in Spain. This situation is unlikely to occur however.
- Issues of ownership and control of the Spanish property might arise.
Future inheritors buying Spanish homes
A full, or partial, sale of the property to future inheritors sidesteps the problem of incurring Spanish inheritance tax upon death. This option shares potential disadvantages with the previous one.
Transfer tax and capital gains tax will also have to be paid although no Spanish inheritance tax will be applicable if the property is transferred in its entirety.
Taking a mortgage loan on your Spanish property
This means the value of the property would be reduced for tax purposes but requires equity released to be placed in a tax haven.
Lenders will only offer a maximum of 70% of the value of Spanish homes and you will need to pay approximately 3% of the equity released. However, the entire amount of the mortgage not yet repaid will be exempted from Spanish inheritance tax.
Life insurance
This option does not circumvent inheritance tax on Spanish homes. Rather it means arranging a policy which will release a large enough lump sum upon death to cover Spanish inheritance tax.
Buying Spanish property through a company
This can be done through either a Spanish or EU company. Spanish company shares can be transferred with no transfer tax. Establishing a company is likely to cost €1,500 initially with a further annual cost.
Buying or owning through an EU company means the transfer of the shares after death takes place in the country where the company is registered. The advantages of this option may be diminished depending on inheritance tax legislation in that country.
Transfer tax at 1% of the property transferred to the company is applicable on both these options.
It is always advisable to seek out professional advice on ways to minimise exposure to Spanish inheritance tax. Spanish homes can be an asset to your family for generations so long as steps are taken to protect your property.
