This article explains what will happens with the Spanish inheriance and donation tax after Brexit and a possible solution to avoid punitive taxation.
Many UK citizens with Spanish property are concerned about what will happen when Brexit comes into force, especially with regards to Spanish Inheritance Tax. Will it change? It will indeed - unless new regulations are already agreed and in force at that time, Inheritance Tax will be very different following Brexit.
Spanish Inheritance Tax is very expensive for those who do not pay Spanish tax (ie. non tax residents). Currently, almost all the regions in Spain have mitigated this tax, for their tax payers, by introducing personal allowances. These allowances greatly reduce the tax liability in the majority of situations. For example, in the Valencian region (including the whole of the Costa Blanca and Costa Orihuela), there is a personal allowance of €100,000.00 for each one of the descendents over 21 years old and for the spouse also. The Europen Union Court of Justice has ruled that all EU residents have to be treated the same as Spanish tax residents. Therefore, these allowances are also applicable to EU citizens who inherit assets in Spain. However, for non EU residents, instead of a personal allowance of €100,000.00, their personal allowance would be less than €16,000. So the difference is clear.
In many cases, UK owners worry about whether their beneficiaries will have to pay punitive rates of Inheritance Tax, when they pass away. In the current situation, with the UK being an EU member, the burden of inheritance tax will not be that much . that is because each one of the beneficiaries will be entitled to the personal allowance of €100,000.00. But what if Brexit is already in force when they pass away? The Inheritance tax will then be very high as the personal allowance will reduced to less than €16,000.00.
In cases where these concerns arise, one solution could be the following:
To donate the property to the descendents - whilst keeping a ‘life-interest’ on it. I will try to put this in an easy way. This is like splitting the property in two; one side would be the ownership and the other side would be the right-to-use (‘life interest’) without being the owner. So whoever has the ‘life interest’ can use the property and even rent it, and the owners are the owners but they cannot use the property until the ‘life interest’ title-holders pass away.
It is imperative to make the donation correctly by means of a title-deed before a public notary. That is, if the donation is not made by means of a title deed, it is not valid at all. The value of the property is split between the two sides – owner(s) and user. The value of the life interest depends on the age of the title holder or title holders and it will reduce as the years run by.
The donation is subject to the Donation Tax which is the same as the Inheritance Tax (actually the correct name of the tax is Inheritance and Doantion Tax). But if these donations are made before Brexit, the beneficiaries will benefit from the current beneficial rate of personal allowances (€100,000.00 in the Valencian region). This will make a big difference on the amount of inheritance tax to be paid.
It is important to take into account that such a donation has some attached costs, such as the fees of the notary and Land Registry. Even so, it is usually worth paying this relatively small price for the security of current personal allowance rates, rather than to wait and see the Brexit outcome. At the end of the day all of us need some peace of mind.
Thank you very much for your time taken to read this post. I hope you find it useful and I hope I was able to make myself clear on some of the technical-legal issues. In my series of posts I am trying to translate these legal issues into “normal” language. By the way, if this post was of interest, you may also wish to have a look at a related article on the importance of having an up to date Spanish will - which is already available on this website.
Please, note that this is general information on legal subject and cannot be used as specific advice on legal situations. It is always recommended to seek legal advice for any specific situation you might be involved.