The Spanish property inheritance tax time bomb
Many property owners in Spain are sitting on a ticking Inheritance Tax (IHT/ISD) time bomb. Most are not aware that when they purchase their “dream” property that they are unknowingly creating a potential financial burden for their beneficiaries. The surviving partner, or beneficiaries, may have a tax bill which exceeds the value of the entire Spanish asset being inherited plus the cost of obtaining probate in more than one country.
‘Tax Treaties’ are often quoted as a method of eradicating IHT. There are treaties that exist between Spain and the UK which reduce the risk of double taxation but these are only effective if the taxes are similar in nature. The fundamental difference between IHT in Spain and the UK is that in Spain the beneficiary pays the tax and will receive the tax demand and in the UK it is the Estate which receives the Tax demand which means there is no treaty on Inheritance Tax. The process of inheriting the property is complex requiring the beneficiaries to travel to Spain to obtain an NIE number (if they do not already have one), verify the Will through a Spanish lawyer and pay the Land Registry and Notary fees plus the calculated Spanish IHT, all within 6 months to avoid late penalties being applied.
Frequently owners are advised to re-finance the property as IHT is not charged if there is an outstanding mortgage and loan. This option can leave the beneficiaries with a huge debt they cannot pay off and many lenders will only finance the ownership if suitable life insurance is taken out. A Life Insurance policy covering the mortgage will mean the property is fully owned by the beneficiaries and inheritance tax is applied to the total value. Owning a property with your children is another suggestion. This is risky and problematic as their share of the property may be jeopardised through financial or marital issues and if they pre-decease the parents then taxes are payable to get the property back.
Our solution to the IHT/ISD problem in Spain is for the owner/s to invest the property into a UK Private Limited company (which Wincham can supply) which they would own as Shareholder/s remaining in complete control of their asset. There is no 7-10% Property Transfer tax payable on this transaction and if the property is invested using a formula agreed by the Hacienda (Spanish Tax office) the property can be invested at a figure which will limit any Capital Gains tax exposure in Spain on the transfer of the property into the UK company. A UK company should not be confused with an offshore company which is obliged to pay an annual tax of 3%. A further advantage of the UK company structure is the ability to offset certain expenses such as mortgage interest, council tax bills and maintenance and could also include car hire and flight costs for the Directors when travelling to Spain.
The Corporate structure is a simple solution, costing less than most probate and legal fees, and saves the additional reporting and taxation burdens for the beneficiaries. Our unique service is available to all Nationalities including both Residents and Non Residents of Spain and can be completed within 2 to 4 weeks if required.
To receive your Free Spanish Inheritance Tax illustration and the opportunity to discuss how this method of ownership could benefit your personal circumstances visit www.winchamiht.com or scan the QR code below. Alternatively contact one of our advisers on +44 (0)1260 299700 (UK) or 0034 965 830 991 (Spain).