The European Court of Justice released a ruling in September stating that Spain has failed to fulfil its obligations to have a fair and equitable inheritance and gift tax regime. As a result of the ruling Spain will have to change its succession tax laws, though we do not know yet how and when.
This story dates back to 2010 when the European Commission requested Spain take action to comply with EU rules in regard to inheritance tax provisions. Spain tweaked its laws but not enough to make them fully compliant with EU law. When no further amendments were made to the legislation, the Commission referred Spain to the Court of Justice in October 2011.
The Commission argued that the rules were discriminatory because they require non-residents to pay higher taxes than residents, and this violates the free movement of people and capital within the EU.
In Spain, inheritance and gift tax (“succession tax”) is governed by both the state and the Autonomous Communities. There are 17 Communities in Spain, and each has the right to amend the State rules to make them more beneficial.
Several Communities have made significant reforms to their succession tax rules. There has been a general trend towards substantial reliefs and increased allowances, resulting in almost total exemption from succession tax in certain cases.
For example, here in the Balearics, the allowance for spouses, descendants and ascendants is increased from €16,000 under the state rules to €25,000. The main home relief is also increased from 95% to 100%, up to a maximum of £180,000 (the maximum is €122,606 under the state rules). With the main home relief, under both local and state rules, the recipient has to keep the house for 10 years.
The system is complex. The rules within each Autonomous Community vary, and different allowances and different rates can apply. However, one thing is certain: for the rules of a particular Community to apply, the deceased must have been habitually resident there for the preceding five years. Otherwise the state rules apply by default.
Currently, non-residents cannot take advantage of the favourable Community rules. As a consequence, higher taxes, often significantly higher, will be payable than if the individual had been living in Spain.
It remains to be seen how Spain will change its succession tax laws so they no longer discriminate between residents and non-residents.
There was a similar situation with capital gains tax prior to 2007 when residents were charged 15% and non-residents 35% (2006 rates). The EU succeeded in getting Spain to end the discrimination, and while it did begin charging everyone the same rate, residents suffered as their rate increased to 18% (between 21% and 27% in 2014).
British expatriates also need to bear in mind that while they may end up with lower Spanish tax liabilities if Spain changes its laws, you still need to consider the UK inheritance tax implications. Mitigation of the Spanish taxes may be academic if you still have the UK tax to pay.
When considering inheritance tax planning, UK nationals should seek advice from an expert who is knowledgeable and experienced on the tax regimes of both Spain and the UK and how they interact.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 23th of October, 2014.