Inheritance tax (IHT) is paid when a relative or friend leaves you money, property or assets after their passing.
If you accept similar assets such as gifts or a donation, IHT is also liable.
Regardless of your official residential status, IHT in Spain affects everyone leaving assets in this country.
Heirs will have to pay IHT when receiving those assets, depending on how they are left and who they are left to.
Where the assets are located in Spain also makes a difference, because each region has different rates of tax, and different taxable deductions too.
When arranging inheritance for your family and loved ones, all of these factors should be considered.
Beneficiaries have six months from the death or receiving the gift, to declare receipt.
An extension can be requested which, if accepted, gives you an extra six months..
Importantly, the inheritance won’t be paid to the beneficiary until the tax due on it has been paid.
To ensure that your heirs pay only the tax they should, professional legal advice is essential.
NB: IHT is known as Impuesto de Sucesiones y Donaciones (ISD) in Spain.
How Is the IHT Calculated?
Spain has a basic three-step process for calculating IHT:
Determine the tax value of the assets.
With property, the value is calculated from the cadastral registry and local index.
Apply reductions and/or allowances to that taxable amount.
Apply tax credits on the resulting taxable amount.
What are the IHT Allowances?
Spain uses a system based on the direct relationship of the heir(s) with the deceased:
Natural and adopted children under 21.
Natural and adopted children over 21, spouse, registered civil partners, parents, adoptive parents, grandparents and great-grandparents.
Relatives of the second and third degree (e.g. in-laws, siblings, nephews/nieces and aunts/ uncles).
Relatives of the fourth degree or with no kinship, for example, a friend or common law partner.
NB: Note the importance of being married, as common law partners are two groups below husbands & wives.
What other allowances are there?
IHT in Spain has state, and also regional allowances.
These apply to both residents and non-residents.
Allowances for relatives depend on their grouping (see above)
Group I & 2: €16,000. An extra deduction of €3,990 for each year they are under 21. The total deduction is limited to €47,858 per child or grandchild.
Group 3: €7,933.
Group 4: There is no allowance at all for unrelated beneficiaries, including unmarried couples unless they are registered as partners.
Main Home Allowance
As far as IHT in Spain is concerned, the ‘main home’ is the property in which the beneficiary has lived for at least three years before the death of their spouse, parent or child.
The exemption also applies if the heir is a more distant relative of over 65 years
and lived with the deceased for at least two years.
To qualify for this allowance, the heir must be a spouse, parent or child AND continue to own the property for ten years from the date of death.
If those conditions are met, the value of the house (for inheritance purposes) may be reduced by 95% with a maximum reduction of €122,606.
Regional IHT In Spain
Each autonomous region has its own unique list which can change from time to time.
Your IHT specialist will have an up-to-date and accurate list.
Below is a list of some of the allowances and deductions available in the different regions of Spain.
NB: In Andalucia, IHT has almost been abolished..
There is a general reduction of up to one million euros for the spouse and direct relatives plus another reduction for disability.
Acquisition of goods and rights related to economic activities
Equity interests in entities, shares
Kinship and disability
Historical or cultural heritage assets.
Kinship and disability
Which region applies to me?
This depends on the residency status of both the heir and the deceased.
Resident heir and deceased in Spain – the IHT regulations in the region where you live are applied.
Non-resident heir and resident deceased –IHT regulations of the region where the deceased was resident are used.
Non-resident heir and non-resident deceased – IHT regulations in the region where the asset with the highest value is located are applied.
For example, if the non-resident deceased owned a property in Murcia valued at €100,000 and another in Andalucia worth €250,000, the IHT regulations in Andalucia would apply.
Life insurance allowances
The maximum allowed is €9,195.
What if a property is inherited between family members within a short timeframe?
If an asset such as a property is inherited more than once within ten years, the IHT paid on the first inheritance is fully deductible on the second and subsequent ‘transmissions’.
As a result, almost no tax would be paid if the second death comes within ten years of the first.
Are there penalties for late payment of IHT?
Yes, if you haven’t requested an extension and fail to pay IHT within six months of the date of death, there is a penalty, which increases more as time passes.
Up to 3 months, 5%
Up to 6 months, 10%
Up to 12 months, 15%
Over 12 months, 20%
Note that interest is also added, which increases exponentially.
Yes, it seems unnecessarily complicated, from what should be a straightforward and stress-free process - especially given the background circumstances.
This is why it’s important to seek impartial, qualified and experienced legal advice to ensure a timely and smooth transfer of assets from the deceased to the grieving family.