Inheritance & Gift Tax
1. What is the inheritance and gift tax?
Inheritance and donation tax law, regulates in Spain the taxation on both inheritance and donation.
Inheritance tax Is the tax payable on the increase of wealth, obtained by reason of death.
Gift tax is the tax levied on the increase of wealth, due to a gift while the donor is alive.
2. What is this tax levied on?
The inheritance and gift tax is levied on the following:
- The acquisition of assets and rights by way of inheritance. Non residents will pay the inheritance tax in Spain only for those assets the deceased left in Spain.
- Obtaining assets and rights by way of gift or any other kind of donation from an alive donor.
- Acquisition of revenue from a life insurance policy, where the contractor party is a different person from the beneficiary.
3. About the taxpayer
Who has to pay this tax? Bear in mind that payment of this tax is not made by the estate, each beneficiary will pay it individually:
- The inheritors, who acquire the assets by inheritance. The tax is payable by the beneficiaries and not by the estate. This tax will be paid before the beneficiary can do any transaction with the inherited assets. It is advisable to seek the assistance of a Lawyer in order to speed up the procedure and get advice on potential tax saving schemes.
- The grantees, who acquire the assets by reason of a gift or gratuitous transfer inter vivos (among people still alive).
- The beneficiaries of the insurance policy, where the contractor party is a different person from the beneficiary.
4. How is the tax base is determined
To establish the basis of the inheritance tax, it is necessary to value the assets and liabilities at the time of death. The total sum, deducted the charges, will be then be liable to tax. Expenses as the funeral and the costs of any litigation connected with the estate can also be deducted.
The assets and rights obtained as a gift are assessed at their real value, deducted charges and liabilities,if any.
In life insurances ,the base is the amount the beneficiary obtains.
5. Calculation of the tax
5.1. General information
Inheritance and gift tax is progressive and the rates applicable are determined depending on the following circumstances:
- The amount transferred to the beneficiary.
- His preexisting wealth.
- The beneficiary relationship to the deceased.
5.2 Steps to follow
The taxable estate is determined by deducting certain allowable figures from the value of the gross estate, which depend on the degree of consanguinity between testator and inheritor.
To the net taxable amount a progressive table rate is applied to arrive to the gross tax payable (which is called cuota íntegra).
It is suggested that all technical and legal matters pertaining to inheritance and gift tax be referred to professionals for advice, guidance and execution.
6. Payment schedule
The inheritance tax shall be paid within 6 months from the death of the testator. You may file for another 6 months extension although in this case you shall pay the belated interest.
7. How can you minimize the effects of this tax?
How can you reduce the effect of this tax? There are some legitimate ways to reduce the inheritance tax effects near to zero.
When the property is transferred from the estate of a decedent to a beneficiary, a 95 % deduction may be applied with the condition that the transferred had lived with the deceased for a period of, at least, 2 years prior to his/her death. This is available to official residents only. The inheritor shall keep the property for 10 years, in case he sells it, he will have to pay the tax due on the original heritance.
Forming a family corporation: The owner of real estate may form a family corporation in which the real estates ownership passes into the hands of the company, each member of the family shall become a director of the company. In this way if a family member dies, the company shall be reorganized, it would be necessary to transfer some company shares, which involves other little tax which falls outside Spanish inheritance tax.
Another possibility is that upon the purchase of the Spanish property, its ownership be split between the bare legal title and the usufruct If a couple only have the usufruct of a property and their children have the ownership of it, the Spanish inheritance tax will be minimal on the death of the usufruct holders. Proprietors cannot sell the property without full consent of the usufruct holders while they are still alive.
Purchasing a property financed by a sizeable mortgage reduce the inheritance tax, as the value of assets is their market value, less any charges levied on them.
It is suggested that all technical and legal matters pertaining to inheritance and gift tax be referred to a an experienced solicitor at Iglesias & Asociados for advice, guidance and execution.