Most people who buy property in Spain do so knowing the tax implications of their purchase, namely that they will have purchase taxes (see HERE) to pay and subsequent annual income tax returns to submit. Fewer are aware that when they sell, they will also have Capital Gains Tax to pay or a retention to bear in lieu of it. Even fewer are fully aware of the potentially hefty inheritance tax implications of their purchase, and if they are to avoid bequeathing a sizeable tax bill to their heirs along with the property it is something they need to consider.
CAPITAL GAINS TAX
CGT (Impuesto sobre Incremento de Patrimonio de la Venta de un Bien Inmeuble) is a complicated calculation, with tax levels and reductions affected by value, date of purchase and sale, and deductions allowed for certain validated and demonstrable expenditures and improvements. In 2010 the CGT rate was raised from 18% to 19% on the first €6,000 of gain and 21% on the rest. Since 2012 this has increased again, and you can assume tax rates ranging between 21% and 27% on different amounts of gain, with any gains accrued since January 2006 not subject to any reductions.
Fiscal residents are granted reinvestment relief if they buy another property with the proceeds of a sale, provided that the property sold was their main home in which they had lived for at least three years prior to selling, and provided that the new property is purchased within two years of the sale of the former. This reinvestment relief is calculated according to how much of the sale proceeds are spent on the new property: if the purchase price of the new property exceeds the sale price of the old one, the gain is completely exempt from CGT. For those who are downsizing, say, and spend half of the sale proceeds on a new property, then that half is all that’s exempt. If there is a mortgage to be paid off with the proceeds, the calculation is based on whatever is left over as capital after the mortgage is cleared. To be entitled to this relief, the capital gain must be declared at the time of sale, together with the intention to reinvest. Fiscal residents over 65 who are selling a main home in which they’ve lived for more than three years are exempt from CGT without the requirement to reinvest.
The rules are different, though not discriminatory, for non-residents. When a non-resident sells a property, CGT is not the main immediate issue because non-residents are required to leave a 3% retention at the point of signing in lieu of final settlement of any CGT due. This 3% non-resident retention is withheld at notary and is deducted off the whole sale price. It is paid by modelo (official form) on the vendor’s behalf to the tax authorities, and can be recovered by the submission of a second, related modelo within three months: a copy of the first modelo needs to be submitted along with the claim, and so the vendor must ensure that he has his copy from whoever paid the 3% on his behalf. Repayment will be made if all tax affairs are up to date, including the CGT against which the retention was made: in other words the CGT must be paid before the 3% is reclaimed.
A big and often unspoken problem for most property owners here is inheritance tax (also imposed according to the same calculations on gifts from the living). In the vast majority of British inheritances, spouses are the designated heirs, and in the UK are tax exempt. In Spain, however, this is not the case, and the resulting tax bill can come as a complete shock to a bereaved husband or wife. In Spain, it is blood relationships, not marital, that are given preferential fiscal treatment, and as a rough guide, ISD (Impuesto sobre Sucesiones y Donaciones) on an inheritance could amount, in some cases, to up to 34% of the inheritance, and therefore in the case of a jointly owned property (normal for couples), up to 17% or so of the property’s entire value.
The tax rate is applied specifically to what is inherited, and after any remaining mortgage is deducted. The rate is banded, and for many people would be around 15-20%, which is the rate applied to an inheritance of between €72,000 and €120,000. So, let us imagine a couple who have an apartment worth around €200,000.
First of all, the surviving partner inherits half of the property, so €100,000 will attract tax. Before the tax is calculated, however, a threshold is applied. There are various thresholds depending on status and circumstance, and they range from €16,000 for non-residents up to €40,400 for fiscal residents of 5 years standing who are inheriting a share of a main family home (actually it is “the most part” of five years, i.e. 3 years). Let’s assume that our couple are non-resident, so they would have a threshold of €16,000. This would be deducted from the €100,000 inherited, leaving €84,000 liable to tax. For that figure, the specific rate is 16.15%, and results in a tax calculation of €13,500. (This example is just intended to give a rough idea. I’m not an accountant, and these figures are rounded off anyway for simplicity. Always see a qualified specialist for specific advice).
In one final step for the calculation, a “multiplier” is applied, and this varies depending on the relationship between the deceased and heir. For bequests between husbands, wives and children, the multiplier is 1 to 1.2 depending on the amount of the inheritance, so the tax as calculated above would end up being between €14,500 to €16,000. For more more distant relationships, the multiplier is 2 to 2.4. The relationships are divided as follows:
- Group I: children under 21.
- Group II: spouses, children over 21, grandchildren, and parents and grandparents.
- Group III: brothers and sisters, aunts and uncles, nieces and nephews.
Whatever the inheritance tax calculation, a separate issue is how much of it one has to pay. There have been periods where a virtually complete reduction was given, sometimes only to tax residents, sometimes only to specific groups, and other times when no discount was available to anyone. The current situation, applicable from 1 January 2020, is that heirs in group I receive the 99.9% discount while groups II and III have a graded reduction with the first €55,000 of tax due still virtually wholly discounted. There is a full explanation on the rates and system from international tax advisers Blevins Franks HERE.
There is a range of solutions available for payment or legal avoidance of inheritance tax for those who will end up having to pay it, 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 (though see THIS from belegal.com, which says “using a UK company incorporated purposely is not a real, valid or legitimate vehicle to circumvent the obligation to pay Inheritance Tax in Spain”). The most important thing is to seek advice from a range of suitably experienced professional tax advisers both in the UK and Spain. Your own financial adviser in Spain and the UK will also have valuable ideas to contribute, but above all else 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.
One general piece of advice that seems particularly useful is to draw up a Will with multiple benficiaries, e.g. bequeathing 50% of an estate to a spouse and the other 50% to children. This would mean that each heir inherits a share rather than everything being left to a spouse, the benefit being that since in Spain the beneficiary is taxed rather than the estate, each heir would inherit a smaller amount, and thus attract a lower tax band. There would also be more tax-free allowances available. Even more beneficially, it would also mean that the residual estate on second death would be less because some would already have gone to the children (or whichever heirs are chosen) on first bequest.
There are additional possible complicating factors for those whose UK estates are valued 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, though inheritance tax paid in Spain can be offset aginst the British liability, despite the lack of a dual taxation treaty. This is a field in which expert professional advice and information is essential, and for this and any other tax field, do start off by having a look at Blevins Franks Guide to Taxes in Spain HERE, and for the matter of inheritance tax in the Canaries in particular, their guide HERE.