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Inheritance Tax in Spain - protecting your heirs PDF
Monday, 31 October 2011 00:00
 

For those of us who are resident in Spain and who own assets here, it's sensible to try to mitigate the effects of the Impuesto sobre Sucesiones y Donaciones (ISD), ie Spanish Succesion Tax, what we call Inheritance Tax in the UK.

Unlike the UK, where IHT is levied on the deceased's estate before the beneficiaries receive their inheritance, in Spain each beneficiary is taxed according to his/her relationship to the deceased BEFORE the benefits are distributed. This may leave your heirs with a big financial headache. Where do they get the cash to pay what can be a significant amount - and within 6 months of the death to boot?

There are legal ways of avoiding or mitigating ISD. I've been doing a fair bit of research on this, because it's a pressing issue for us. All our assets are here in Spain and none of our heirs, five children between us, would be able to pay their ISD bill as things currently stand. They would be forced to sell the assets (property), but there’s no guarantee they’d be able to do that within the 6 months period.

As a result of my investigations I have unearthed two methods, both apparently legal, and a third option:

1. Take out a "phantom" mortgage with a trusted friend. No money changes hands, it's just a paper thing. A debt on a property, eg a mortgage, is exempt from tax, so on death, nothing is payable against the amount of the mortgage and the mortgage papers are simply torn up. You need a Spanish will but not a UK one. This method was described to us by our lawyer here.

2. Set up a UK private limited company and transfer all your assets into the company. You and your heirs become shareholders and when you die your shares pass to the remaining shareholders, ie your heirs. There is no tax payable in Spain as the UK company is beyond the jurisdiction of the the Spanish Hacienda. UK IHT would only be payable if the value of the assets exceeds the UK IHT threshold, currently £325,000 (£650,000 for a couple). In this scenario you need a UK will, but not a Spanish one, apparently. This method was described to us by a company called Wincham.

3. Calculate the likely ISD amounts for your heirs, and if you can afford to, set these monies aside in a separate account. You’d need to be careful how you do this, however, so that the cash in these accounts is not taxed also!

The problem I see with the first two methods is that they are loopholes which the Spanish Hacienda will no doubt try to close. They are also somewhat theoretical, I fear. Have they been tested out in reality?

I have also read much criticism on some websites of the Wincham method, eg that it is costly to set up and maintain, and that the assets may indeed be deemed by Hacienda to be subject to ISD, since they are located in Spain and the shareholders/directors (you) are resident here and therefore subject to Spanish tax legislation.

It’s a bit of a nightmare, to be honest, but an issue that shouldn’t be ignored.

If anybody else has any information, comments or suggestions about how to avoid or mitigate this punitive tax, please post them below.

© Paul Whitelock

 

Related articles:

Inheritance Tax - Olive Press article about Spanish ISD

Spanish Wills and inheritance tax - article in English by María Castro, Spanish Lawyer

Q & A on Spanish Estates - Olive Country Life magazine article by Rob Westwater, English Lawyer

 

Tags:  Inheritance Tax, Succession tax, Impuesto sobre Sucesiones y Donaciones, ISD, IHT, avoiding inheritance tax, mitigating inheritance tax, UK private limited company, Hacienda, phantom mortgage, Wincham, María Castro, Rob Westwater, paul whitelock, www.a1-solutions-spain.com

 

Paul Whitelock

Paul is a Joint Honours graduate in Spanish and German, a qualified teacher (PGCE) and has a Member of the Institute of Linguists (MIL) qualification.

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