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Britons living in Mallorca and Menorca should get to grips with the Spanish succession tax rules to make sure their legacy goes to the right hands at the right time. 

If you live in Spain or have Spanish assets, it is likely that your heirs, or even you, will be affected by Spanish succession and gift tax at some point. You need to understand how this tax will affect you and your family, and what steps you can take now to mitigate the impact.

With the right knowledge and careful planning, you can take steps to make sure your legacy goes to the right place without attracting more tax than necessary. First you should get to know some of the key features of the Spanish system.

It is the recipient, not the donor who pays tax

Unlike the UK, where tax is paid by the estate before an inheritance or gift changes hands, in Spain it is payable by each person on the receiving end. Spanish succession and gift tax – Impuesto sobre Sucesiones y Donaciones (ISD) – is due if either the asset being inherited or the recipient is based in Spain. The same rules apply for gifts.

For Spanish assets, tax is payable regardless of where the beneficiary is resident. So if you leave your Spanish property to children resident anywhere in the world, they will pay Spanish succession tax on it. For inheritances received by Spanish residents, taxation applies no matter where the assets being inherited are located. If you receive a legacy from the UK, therefore, you will be liable for Spanish succession tax if you are resident here.  

Tax is payable within six months after the date of death, even if the funds are not immediately accessible. As you cannot sell the asset to pay the tax, this could make it difficult for some heirs to pay, especially on higher value inheritances. 

Your spouse and children are not exempt 

Another aspect that differs to the UK is that Spain offers no blanket spouse-to-spouse exemption on inheritances. So if you are resident here and leave any assets to your spouse (who is also Spanish resident), they will pay tax on it. Even for non-residents, Spanish assets like property will be taxable between spouses in Spain. Then, on the second death, succession tax is payable again on Spanish assets passed on to children and other heirs. 

While there are some allowances under the state rules, they are just €15,957 for spouses, descendants and ascendants (although an additional allowance is available for children/grandchildren under 21 years-old). This does not include stepchildren, however, who can usually only receive the same €7,993 allowance as siblings, cousins, nephews and nieces. Other heirs – including unmarried partners – may receive no allowance at all. 

What is payable depends on the region

The Spanish government’s state succession and gift tax rates currently range from 7.65% to 34%. With additional charges based on the relationship with the recipient and their net worth, taxation can reach as high as 82% in very extreme cases.

However, each ‘Autonomous Community’ has the right to amend the state rules, and many of them do so in favour of the taxpayer, including the Balearic Islands. 

Here, there are special succession tax rates for spouses and direct family members, ranging from 1% for inheritances up to €700,000 to 20% for those in excess of €3 million. 

Allowances in the Balearics are also more generous. At €25,000, the regional reduction for spouses and other close family members offers over 56% more than the state reduction. Children under the age of 21 receive a 99% deduction, plus €6,250 for each year below 21, up to €50,000. Although step-children and other family members receive little more than the state allowance at €8,000, other heirs receive €1,000 instead of no deduction at all.

The rules that apply in Mallorca, Menorca and the other Balearic Islands also allow unmarried couples to benefit from the same reliefs as spouses, so long as they are registered as a parejo de hecho (if they meet certain requirements).

When inheriting a main home from a spouse or direct family member, the Balearics offers a 100% reduction up to €180,000 per person, so long as the property is kept for at least ten years. This compares favourably with the state allowance of 95% and cap of €122,606. 

However, determining whether state or autonomous region rules will apply when calculating succession and gift tax is not straightforward and can vary depending on various factors. Because of these complexities, it is essential to take advice, ideally before buying a property or moving to Spain. 

You could still face UK inheritance tax

As UK inheritance tax liability is determined by domicile rather than residence – and domicile is an incredibly ‘sticky’ concept – it continues to affect many British expatriates living here. It means those still domiciled in the UK could be liable for both UK inheritance and Spanish succession tax on their worldwide estate, although the tax paid in Spain can be deducted from UK liability on the same asset to avoid double taxation. 

Ultimately, it is important to understand the succession and gift tax rules and how they apply to your situation, as well as how they affect any UK liability. Couples also need to consider the best solutions should the surviving spouse remain in Spain or return to the UK. While it is possible to shed your UK domicile status, this is a specialist area so professional advice is essential to establish your position and plan accordingly.

With Brexit likely to complicate things further, now is a good time to review your succession tax planning and explore your options. Every family is different, so your approach should be tailored to meet your personal objectives and unique situation. You should also consider how your legacy will be received by your heirs – an extra gift you can leave them is having their inheritances structured in a tax-efficient way to maximise their value.

Blevins Franks’ specialist cross-border expertise ensures our clients make the most of compliant opportunities to reduce Spanish succession and UK inheritance tax, as well as protect their wealth in their own lifetime. Speak to us for peace of mind that your legacy will go as far as it can and that you have the most suitable approach in place, for yourself and your chosen heirs.

Ask our financial advisers for help

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.