The European Court of Justice has ruled that the Spanish authorities cannot charge different rates of inheritance tax for residents and non-residents.
Non-residents who have been discriminated against by paying more tax than Spaniards for inheritances or gifts of property are likely to be due a refund of the difference. There is a complex range of tax relief options in Spain that can reduce the tax to almost zero for residents, and now for non-residents.
Non-residents may be owners of holiday homes in Spain or expats who split their time between Spain and the UK. The court ruled recently that charging other members of the EU different rates to Spanish residents went against the spirit of the European Union. It stated the Spanish legislation was discriminatory and there was no reason why inheritance tax should be charged at a higher rate for non-Spaniards than for Spaniards.
The European Commission referred the case to the court in 2012 after considering that the legislation was incompatible with the free circulation of people and money within the EU. In Spain, inheritance and gift tax (known as succession tax) is governed by both the state and the 17 autonomous communities.
Many of these communities have amended the state rules to make them more beneficial, but only for residents. In order to be classed as a resident, you must have lived in Spain for five years. Non-residents have to pay the national rate of tax which is far less favourable.
The Result of the New Law
Now in Murcia, the Balearic Islands, Madrid and Valencia, up to 99 per cent of the deceased’s assets are exempt from succession tax where the beneficiaries are children and/or a spouse. In Andalucía, up to €175.000 (£148,000) inherited by a spouse or children can be tax-free, and in Catalonia allowances are a maximum of €650.000 (£512,000) for a spouse and €400.000 (£315,000) for a child.
Such generous exemptions are in stark contrast to the state rules, where the allowances were very much reduced. Under the state rules, the general allowance was only €16.000 (£12,600) for inheriting spouses or children. Now the INHERITANCE TAX has changed dramatically.
Foreigners Who are Tax Residents in Spain
The new European Directive 650/2012 came into effect on August 17, 2015. If you are tax resident in Spain, (you file your annual tax declaration), you should state on your Spanish Will that you wish THAT THE NATIONAL LAW OF YOUR EUROPEAN COUNTRY will govern your inheritance.
Failing to do so, your estate will be distributed according to the Spanish Law of Succession in which one-third of your estate will go to the children in equal parts, another third must also be left to the children and only one-third left has free disposition to be left to the testator’s choice. If somebody is living in Spain but is a national of a different country, they should update their wills.
The directive EU 650/2012 defines different concepts, and they are:
– Article 21 of the Directive:
Unless otherwise provided for in this Regulation, the law applicable to the succession as a whole shall be the law of the State in which the deceased had their habitual residence at the time of death.
EU people living in Spain, under Spanish law, cannot leave everything to the surviving spouse, as they have to follow the compulsory Spanish inheritance law. If you are resident in Spain, unless you establish in your will that you wish that your national law is applicable by the time of death, it will have to follow the Spanish System
– Article 22 of the Directive:
A person may choose by law to govern their succession as a whole under the law of the State whose nationality they possess at the time of making the choice or at the time of death.
This article explains that you can override the compulsory law of heirs by simply stating in your will that you wish for your estate to be governed by your national law. How do you achieve this? You will have to sign a new Will.
An existing will cannot be modified, extended or fixed. A new will always cancels the last one and the last one duly signed in presence of a Spanish Notary Public is the one that prevails.
Every Spanish Will is registered in the Central Office of Wills which is located in Madrid, independently of the city and Notary Public office where the Will is signed.
If you have children but have made a will leaving all assets to your spouse, make sure that you have clearly stated on your will that you wish your national law to govern your succession.
Written by Raquel Pérez, Director of the Perez Legal Group, comprising Lawyers, Chartered Accountants and Fiscal Advisors. www.perezlegalgroup.com
Reposted from the Essential Magazine, November 2015 edition, to view the original online version use this link