Canary Islands To Reduce Succession and Gift Tax
The Canary Islands Prime Minister, Sr. Fernando Clavijo, recently announced that a 99% reduction for succession and gift tax would be introduced for children and spouses. This is good news for all Canary Islands residents, as the region has currently one of the highest succession tax burdens in Spain.
In fact, succession tax can be so punitive that the number of heirs renouncing their inheritances because they cannot afford the tax bill has increased notably in Spain.
What is Spanish succession tax?
Spanish succession tax or Impuesto sobre Sucesiones y Donaciones (ISD) is a tax on inheritances and gifts and is paid by the recipient of the inheritance or gift. It is due only if the recipient is resident in Spain or if the asset being inherited or gifted is a Spanish asset, such as real estate or moveable property situated in Spain.
There is no blanket exemption between spouses, therefore where they are both resident in Spain, when one dies the other can be fully liable on the worldwide assets inherited, including pension funds.
So, when you die, your spouse will have to pay succession tax on the pension funds they inherit from you. This could reduce their monthly income in future.
“When you die your spouse will have to pay succession tax on the pension funds they inherit from you. This could reduce their monthly income in future.”
Currently, the progressive rates for succession tax range from 7.65% for assets under 7,993 euros up to 34% for assets over 797,555 euros. Multipliers, depending on the relationship between you and the beneficiary and their personal net worth, can take the tax rate much higher in some circumstances. Under state rules, spouses and children over 21 receive a tax-free allowance of just 15,957 euros.
How local communities can amend the rules
The local Spanish autonomous communities can adjust the tax rates and allowances to make them more beneficial. Some regions have significantly eased the tax burden for spouses and children; however, in the Canary Islands the tax liability has so far remained substantial.
The allowance for your spouse here is currently 40,400 euros, and this also applies to unmarried couples who have registered as a “pareja de hecho” – a de facto couple. If you have not registered and live together unmarried, your tax bill will be at least double.
Everything else is liable for tax at the rates mentioned above. There is a 99% deduction on the main home, up to a maximum of 200,000 euros, provided the property is kept for five years.
The local rules should apply to your assets if you are resident in Spain or another EU/EEA country. If you own assets here but live outside the EU/EEA, then the state rules may apply to those assets. This is however quite complex, so you should seek personalised advice.
Exactly who benefits from the reform?
In his acceptance speech on 6th July, Sr. Clavijo announced that relatives in groups I and II will receive the 99% reduction in succession and gift tax. Group I includes natural and adopted children and other descendants (grandchildren, great-grandchildren etc) under 21; group II includes natural and adopted children, other descendants aged 21 and over, parents and other ascendants (grandparents etc) and spouses.
This re-establishes the succession tax regime that existed in the Canary Islands until July 2012, when there was a 99.9% reduction.
“Sr. Clavijo announced that relatives in groups I and II (children and spouses) will receive a 99% reduction in succession and gift tax.”
On 16th July 2015, Sra. Rosa Dávila, the Canary Islands regional tax minister, confirmed that this reform will be included in the 2016 Canary Islands budget and it is expected to be approved soon by the regional parliament. According to government analysis, it will represent a saving of about 30 million euros for Canary Islands taxpayers next year.
She also said that they intend to introduce further tax reductions for Canary Islands taxpayers by 2017.
A game-changer for succession tax
This is a real game-changer for death and gift taxes for nearly every group I and II beneficiary. This includes non-residents with assets in the Canary Islands and residents receiving assets from elsewhere. This 99% allowance will make a huge difference in payable taxes, which can, in many cases, ensure wealth is passed down the bloodline providing obvious benefits over the years ahead. This change should also reduce the numbers of Canary Islands residents leaving and may even tempt the wealthy to reside here.
This is therefore very welcome news for everyone who lives here. However, estate planning remains as important as ever, particularly if you have heirs other than spouses and children, and if you wish to ensure the right people inherit your assets at the right time.
You should check your Will to see if the correct people are to benefit from your estate, especially taking into consideration their qualification for this potential succession tax change. Always seek expert advice on any aspect of your estate planning to make sure your beneficiaries do not pay an unnecessary tax bill on what they receive.
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.
Blevins Franks has 20 established offices across six countries, and decades of experience advising British expatriates on their investment strategies and tax planning.
Contact our Partner Paul Montague on 922 716 079 or firstname.lastname@example.org