Spanish succession and gift tax (SSGT) is an unpopular tax, so much so that thousands of people renounce their inheritance each year, largely because of the prohibitive tax bills. However, over recent years reforms made by many regional governments have significantly reduced this tax liability for spouses, descendants and ascendants.
Now, a Spanish Supreme Court Ruling is reassuring for non-EU/EEA residents. There is a strong chance these regional rules will continue to apply to UK residents after Brexit, even if the UK ends up outside the European Economic Area (EEA).
If you live or have assets in Spain, your succession tax liability depends on whether you (when you receive an inheritance or gift) and your beneficiaries (when they receive assets from you) are eligible for the more beneficial regional rules. If not, tax is calculated under the state rules, where the highest reduction is just €15,956. In contrast, some regions offer a 99% succession tax relief and even substantial exemptions for spouses and descendants.
In the past, you had to be habitually resident in an Autonomous Community to benefit from its regional rules.
Then in 2011 the European Commission referred Spain to the European Court of Justice (ECJ) for discriminatory rules on succession and gift tax that required non-residents to pay higher taxes than residents. This went against the EU’s fundamental principle of free movement of people and capital. In 2014 the ECJ ruled that Spain was acting illegally by allowing this different tax treatment.
In January 2015 new rules come into force so that beneficiaries living outside a Spanish Autonomous Community can now benefit from the local rates and allowances… but only where they live in the EU or EEA. This is despite the fact that the EU Treaty’s free movement principle also includes third parties.
Recently, the Spanish Supreme Court published a landmark judgement concluding that the terms of the ECJ 2014 ruling must be extended to all non-resident beneficiaries, regardless of where they live.
2018 Spanish Supreme judgement
On 19th February 2018, the Supreme Court reached a judgement in the case of a Canadian resident beneficiary inheriting an estate from her mother who lived in Cataluña. She had paid over €300,000 in succession tax as per the state rules.
The court ruled that the SSGT rules breach the EU Treaty’s free movement of capital rules, and that the 2014 ruling should also apply to non-EU/EEA residents. It believes the breach is so clear and serious it also justified the civil liability of Spain – it recognises the rights of taxpayers to seek damages.
How does this change the rules?
The Spanish succession and gift tax rules themselves have not changed; the ruling is not currently binding for Spanish tax administration so at present the regional beneficial rules still do not apply to non-EU/EEA residents. However –
1) The judgement gives non-EU/EEA residents a strong argument as to why they should be able to apply regional tax rules and rates when receiving inheritances and gifts.
2) It is possible that Spain will change its legislation in future to extend regional benefits to non-EU/EEA residents.
3) It opens the door for non-EEA resident taxpayers to claim back refunds for succession and gift tax paid under the discriminate rules over the last four years (the statute of limitations period).
A relief for UK nationals with Brexit on the way
This good news is particularly relevant for UK nationals. As things currently, if the UK ends up outside both the EU and EEA after Brexit, anyone living in Spain and receiving an inheritance from the UK, or any UK resident receiving an inheritance or gift from Spain, cannot apply the beneficial regional rules.
So if Spain changes its legislation to cover non-EU/EEA residents, then the local rules will apply to them too, regardless of the final Brexit terms. Even if the rules do not change, they may be able to use the Supreme Court judgement to claim the application of the regional rules, in certain cases.
Cross-border estate planning is complex and Brexit adds further complications and concerns. Blevins Franks has been advising expatriates in Spain for decades. Contact your local office for specialist, personalised advice on establishing an effective estate plan and provide peace of mind that the right money will go to the right people at the right time, with as little tax as possible.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
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This article was written on the 2nd of May, 2018.