With 17 Autonomous Regions and two Autonomous Cities (Ceuta and Melilla) each having different guidelines, it’s understandable that many people are totally confused when it comes to Spanish Inheritance Tax!
When considering a new life in Spain, we’re usually thinking about what part of the country would most suit our needs … cost of living, climate, being close to an expat community, being as far away as possible from an expat community 😉, being close to other family members, nearest airport etc etc. However, there’s one question I never see on expat forums … ‘how much tax will my partner and/or children pay when I die’. People thinking of making a move to Spain rarely give this a thought, and yet within a few months/years of living in Spain it becomes apparent that even transfers between husband and wife are not necessarily tax free! Organising your finances in a way that avoids the Spanish Inheritance Tax trap is a broad subject, but I’ll try to summarise the main points I recommend you consider in order to pass on as much of your hard earned cash to those you love with ease.
There are a number of issues that should be considered, which are:
Dying without a Spanish Will
Using your UK Will to cover your Spanish assets
Making a Spanish Will
Your savings and investments
Your pensions
How not being married to your partner affects your Spanish inheritance tax liability
Ensuring all of the above have been considered and addressed before death will make life much less stressful for those you love and reduce tax paid at the same time.
Dying without a Spanish Will
If you are a British national you have the freedom to choose who to leave your assets to. Many who jointly own property for instance, would like their partner/spouse to automatically receive their share on their death. What many expats don’t realise is that if you die without a Spanish Will, Spanish Laws of inheritance will be applied, automatically leaving a share of your property to children and whilst your partner may have the right to live in the property until their death, they won’t own the whole property outright (that’s how many Spanish properties end up being owned by multiple members of a family). Spanish nationals don’t have freedom of choice, and neither do you if you haven’t made a Spanish Will.
The Spanish have “Compulsory” or “Obligatory Beneficiaries” (Herederos Forzosos), which means that the testator cannot dispose of the full inheritance freely. In order to protect the family and provide for the children, Spanish inheritance laws restrict the testator’s freedom to leave his property to anyone he pleases. Spanish law requires a parent to leave two-thirds of his estate to his children. This is a frightening and often complicated situation to leave your family in, especially if you are on a second marriage.
Using your UK Will to cover your Spanish assets
This is an option, but I don’t recommend it because it creates more stress for your loved ones and is totally avoidable if there is a Spanish Will in place.
In order to legalise a UK Will for Spain and be able to execute it (to be able to transfer the property ownership, make a new escritura, register the change, and eventually sell it), there are several steps that must be taken:
1. A certified copy of the grant of probate must be legalised by the Spanish Consul in the UK.
2. An official Spanish translation of this certified copy must be prepared and validated by the Consul.
3. A Spanish lawyer must be empowered to prepare a list of the assets in Spain, and to execute the Will, and pay the inheritance tax.
4. The Spanish Consul must prepare a certificado de ley (certificate of legal compliance), which confirms that the testator had the legal capacity to make a Will, that the Will is valid, that the Spanish Law of Obligatory Beneficiaries does not exist in the UK, that the Will has been duly proven and that the trustees named have the legal powers to administer the estate. It declares your Will effective to be executed in Spain, and authorises your lawyer to carry this out.
Personally, I think that’s an awful lot of work and additional stress for family members that can be avoided simply by making a Spanish Will.
Making a Spanish Will
Making a Spanish Will, which is worded correctly as a British national, is very important. I recommend making a Spanish Will to deal with Spanish assets and an English Will to deal with UK assets. Care must be taken though that one does not cancel the other and the use of the words ‘this is my last Will and Testament’ will cancel any Will made before, including a Spanish Will! We work with an English Solicitor who is also a qualified Abogado in a Spanish Law firm, he can organise both UK and Spanish Wills. Using a lawyer who understands both the English law system and the Spanish law system brings great advantages when trying to ensure that your Wills are written correctly. I’d like to mention here also that there are two other things that it’s important to be aware of:
- although the Modelo 720 return (the return that lists assets held outside Spain with a value of more than €50,000) is not used for income tax purposes, it is used by the Hacienda to monitor inheritance tax due on your death to ensure tax is paid on your worldwide assets.
- If you are leaving Spanish property to your beneficiaries (eg; your children) who live outside of Spain, it’s advisable for them to have an NIE number prior to your death. The escritura cannot be transferred to their name if they don’t have an NIE, even if they intend selling the property.
Your savings and investments
This is crucial, not only from a tax efficiency perspective whilst you are alive but to avoid unnecessary tax and stress on your death. Moving to Spain and keeping your UK ISA, Premium Bonds, Building Society savings accounts and Investment Bonds in place offers no benefits to you as a Spanish resident. In fact, it causes additional and totally avoidable income tax each year when interest/growth is added! In order to future proof your tax planning and offer protection from Spanish Inheritance Tax on first death, your ‘nest egg’ should be reviewed and a move to a Spanish Compliant Investment should be considered. That does not mean bringing money into Spain (I never recommend bringing money into Spain due to potential embargoes). A Spanish Compliant Investment follows guidelines agreed with the Hacienda and by doing so allows your savings to pass to your partner/spouse on first death totally free of inheritance tax (irrespective of the inheritance tax rules in your particular region). The same does not apply to any savings/investments held outside a Spanish Compliant Investment.
In addition, savings held in this type of investment do not have to wait for your Will to be processed before your savings can be transferred to your chosen beneficiary. In the case of a joint investment, the Spanish Compliant Investment automatically continues in the name of the survivor with no tax payable. On second death by naming beneficiaries the proceeds of the investment will be paid directly to your chosen beneficiaries. This can be particularly valuable when there is inheritance tax to be paid on a property, as the property cannot be sold to pay the tax. The tax must be paid before the ownership of the property can be transferred and hence any intended sale. Any savings held in a bank or building society account in the UK, or in a Spanish bank will not be available to your beneficiary until your Will has been processed. This could leave your beneficiaries in the difficult position of not having the funds to cover the Spanish Inheritance tax due, even if they are the ultimate owners of your Spanish property and other savings.
Your pensions
A large part of the work I do for clients includes considering longevity … how many years a pension and/or investment income needs to last, what happens to the pension/investment income if one part of a couple dies, will the remaining partner stay in Spain or move back to the UK, what are the implications of this from a tax perspective … all things I consider and discuss with clients, in addition to other factors, before making a recommendation.
There are a number of issues to be aware of should you choose to leave your private pension in the UK. Briefly:
- The income is typically taxed under PAYE even when you are not UK resident.
- Although your beneficiaries will receive the proceeds tax free should you die before your 75th birthday, unfortunately proceeds from a UK pension will be taxed in the event of your death once you reach age 75, whether taken as income or as a lump sum, the beneficiary will pay tax at their marginal rate. This could result in your beneficiary moving into a higher tax bracket too.
- If your UK pension value is nearing or above the Lifetime Allowance (currently £1,073,100) you are leaving yourself exposed to a lifetime allowance charge of 25% on the excess if taken as income, and 55% on the excess if taken as a lump sum. Normal income tax also applies at your marginal rate in addition to this charge.
- Potential Spanish Inheritance tax.
- Your partner/spouse being forced to encash the pension on your death, even if markets are down.
All of the above issues can be avoided should you choose to transfer your pension overseas. This is known as a QROPS (Qualifiying Recognised Overseas Pension Scheme). Of course, a QROPS isn’t right for every type of UK pension, nor is it right for every expat, but I highly recommend that you review your pensions as part of your move to Spain and assess your options.
How not being married to your partner affects your Spanish inheritance tax liability
You’d be surprised how many of our clients get married or obtain a Civil Partnership after taking our advice! Some people are not drawn to ‘tie the knot’ and live happily as a couple for many years (especially those who have been married before). Whilst a romantic beach wedding may not appeal to everyone, unfortunately ‘living over the brush’ (as the old saying goes) puts you at a massive disadvantage when it comes to Spanish Inheritance Tax. The reason for this is that Spain taxes the beneficiary rather than the estate as a whole (that takes some getting your head around as a Brit). In Spain, the closer you are related to the deceased the lower the inheritance tax liability. Unfortunately, the reality is that if you are not married or do not have a Civil Partnership (known as a Pareja de Hecho in Spain) you will be treated as unrelated on death, which increases any inheritance tax payable by between 100% and 140% dependent upon the value of assets already owned by the beneficiary.
As you can see, there’s a lot to think about, but by ensuring you have received the right advice for your own situation, you can feel settled knowing that you’ve left your loved ones in the best possible position in the event of your death.
Speed Financial Solutions are a highly qualified and regulated financial services provider looking after clients throughout Spain and the UK. Established in 2010, we provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your financial planning.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII (Level 7) and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels. Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
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This communication is for information purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
20 March 2023