How to calculate your Liability to Spanish Inheritance Tax and reduce it by up to 100%

If you are a Spanish resident or even if you only own a holiday property in Spain then your assets will be liable to Spanish Inheritance Tax (IHT) when you die.

For Spanish residents the liability is on their worldwide assets when they pass to the inheritor. For Non-Resident property owners in Spain, it is on their Spanish assets, e.g. their property plus contents/car and bank accounts etc.. Unlike the UK there is no automatic exemption on transfers between spouses although some of the Autonomous Regions have introduced some allowances which can help spouses and children under 21 who live in the property as their main residence.

IHT in Spain is not at a flat rate as it is in the UK. After a fairly modest allowance (€15,957 in most cases) the balance is taxed at rates between 7.65% and 34%! When the inheritor is not a close relative of the benefactor, the tax can be substantially increased - in some cases by up to 140%, i.e. an effective top rate of 81.6%.

Under Spanish Law the value of the property for the assessment of IHT is defined as ‘el valor real de los bienes’ (the market value of the assets). Currently, in some regions, Hacienda personnel are content to use either the Escritura value or the Valor Catastral (rateable value) whichever is the greater. However, as these are nowadays just a fraction of the real value, many Hacienda offices are using at least a multiple of the Valor Catastral (e.g. 2.4 times the Valor Catastral) and increasingly the regions will be asking for the current market value - as estimated by a properly qualified Spanish assessor.

The reasons for this are not difficult to fathom. First of all the Spanish authorities can clearly see how property values have outstripped Escritura values and the Valores Catastrales and they see they are losing out on huge amounts of tax. Secondly, from 1 January 2006, Spain ceased to be a net recipient of funds from the EU and started to be a net contributor. Spain therefore needs to collect more domestic tax. One way to achieve this, without putting tax rates up, is to simply apply the letter of the law which states that the valuation of the property for IHT purposes should be the (Valor Real) - the Market Value.

So in future, the owners of Spanish property, be they resident or non-resident, may no longer escape with low levels of IHT. Luckily the answer is very simple. By using the property as the security for a loan, the assessable value of the property is reduced by the amount of the loan. This can reduce the potential Spanish IHT by up to 95%

OMM Spanish Inheritance Tax Reduction Arrangement (SITRA)

OMM's Spanish Inheritance Tax Reduction Arrangement (SITRA) creates this saving — and does so in a completely self-funding way thereby avoiding any reduction in your current retirement income purely so that your inheritors can inherit more of your wealth. In most cases you can actually produce enough income from the arrangement to not only fund the loan but also generate an additional income from the capital currently locked up in the property.

A Typical Example of the Inheritance Tax Problem

Mr. & Mrs. W. live in Spain in a villa valued at €600,000. Their Wills stipulate that in the event of their deaths, their half (€300,000 each) of the property goes to the other and that, on the second death, their two children inherit equally.

Inheritance Tax is calculated as follows:

The Solution

Despite an individual’s possible aversion to having a mortgage on their property, there is a very compelling financial argument in its favour.

A mortgage automatically reduces the “base imponible” (assessable value) for Spanish Inheritance Tax purposes by the amount of the mortgage. In the example above, a mortgage of €480,000 (80%) would reduce the assessable value to only €120,000 and the new IHT calculations would be as illustrated below:

This represents a reduction in Spanish IHT of €141,525 or 91.7%

More information

If you would like more information on Inheritance Tax Planning and a free copy of our booklet A Guide to Equity Release in Spain, please click here and complete the quick enquiry form with your details.