Janet Anscombe

Most people who buy property in Spain do so knowing the tax implications of their purchase, namely that they will have purchase taxes to pay and subsequent annual income tax returns to submit, and, when they sell, Capital Gains Tax (since 1 January 2010, the computation has become very complicated but assume 19% after allowable deductions) or non-resident retention (3% of declared escritura sale price).

Few, however, know or are fully aware of the potentially hefty inheritance tax implications of their purchase, and it is something they need to consider because one way or another they are likely to end up bequeathing a sizeable tax bill to their heirs along with the property. For unlike the UK’s Inheritance Tax (IHT) which is levied on the bequeathed estate, Spain’s equivalent Impuesto sobre las Sucesiones y las Donaciones (ISD) is levied on the heir, based on the amount received, and does not give exemptions to spouses.

Of course, in the vast majority of British Wills, spouses are precisely the ones who are the designated heirs, and the resulting tax bill can come as a complete shock to a bereaved husband or wife used to the UK system of IHT exemption for spousal bequests. In Spain, however, it is blood relationships, not marital, that are given preferential fiscal treatment, and as a rough guide, ISD on a spouse’s inheritance could amount to around 30% of the inherited half, therefore 15% or so of the property’s value. For more distantly related heirs, indeed, this amount can increase greatly.

Recently, the Canarian Autonomous Region has come into line with other parts of Spain, and granted a 99.9% reduction in the tax rate for inheritance between close relatives (parents, children, spouses and family partners). The problem for most expatriate property owners in Tenerife is that to benefit from the tax break the testator must have been fiscally resident in the Canary Islands for at least five years, and the heir for one year, and for both to have been so demonstrably and legally.

Fiscally resident does not just mean living here, but being resident for tax purposes and submitting annual tax returns, proof of which must be provided by means of a certificate from the Hacienda. Moreover, after inheritance, the heir must remain fiscally resident in the Canaries and not sell the property for a further 5 years. As the old saying has it, the only things certain in life are death and taxes, and in the case of ISD for non-residents or any residents who have been beneath the fiscal radar, the two come together.

A further potential problem arises for estates valued in the UK at more than £325,000 because there is currently no dual taxation treaty on inheritance tax between Spain and the UK. Thus for UK domiciled individuals, which is what the vast majority of us are even if fiscally resident in the Canaries, British IHT might be payable in addition to ISD.

There is a range of solutions available for the payment or legal avoidance of ISD/IHT, whether a straight life insurance policy to provide a lump sum to pay the tax, or trust funds, or gifting the property into an English company. In this last respect, Rachael Bayliss of tenerifetax can provide an illustration of any given ISD/IHT liability, as well as the costs for setting up the English company. It is most important that expatriate property owners seek advice from a range of suitably experienced professional tax advisers both in the UK and Spain. Your own gestor in Spain and accountant in the UK will also have valuable ideas to contribute. Remember, though, that everyone will almost certainly have an angle, or an interest in getting your business. Make sure that the advice you get comes from as independent a source as possible, and that your final decision is in the best interests of yourselves and your heirs.