A nice bonus, proper savings or an unexpected windfall: you can make your dreams come true and buy that wonderful villa on the Costa del Sol. Now it’s time to live it up: the kids and the grandchildren may also enjoy their holidays and it will be a wonderful party!

You might be one of those privileged who have realized their dreams years ago  and now you may establish the fact – to your satisfaction and relief – that a villa or apartment on the Costa del Sol appears to be a solid investment as well.

Increases in value of 250% in 10 years time are quite common and many have indeed landed their cool profits.

But then one of partners passes away.

The dream is shattered; not only the distress dominates life, but then the financial worries have to be faced as well. In Spain – like in the UK – Inheritance tax is levied on someone estate. The IHT is also payable if the deceased was not (ordinary) resident in Spain, but only owned a property, like a villa or apartment in Spain.

The IHT rate is based on a progressive scale starting at 7,65% rising up to more then 68% !

This sounds pretty alarming and that it is!

Although the IHT in the UK is a flat 40%, this is actually less horrible then its Spanish  pendant. In the UK one will enjoy a threshold of  £ 263.000 (approx. € 395.000), in Spain the threshold is only a mere € 15.957 or £11.000. Let’s explain the theory with a real live example.

Suppose you own a villa that is worth today € 750.000 (£ 520.000). The villa is registered in the name of your husband only. He passes away, leaving a last will in which you are appointed the sole heiress.

Your Spanish estate is therefore € 750.000.

Your liability to Spanish Inheritance Tax is € 185.000 (£ 128.000 ) . The overseas tax you have paid is set off against UK tax, but the tax credit relief cannot exceed the amount of UK tax. If this estate was only taxed in the UK, your tax bill would have been € 140.000 . After offsetting the Spanish IHT already paid, no UK tax remains, but the Spanish is a cool € 45.000 higher!

An even more striking difference is showed when the property is registered in both names of the couple. In that case only half of the property is inherited by the spouse or husband and the Spanish IHT shall then amount to tax assessment of € 53.575,--. BUT, the UK IHT would have been ZERO in this example: the total estate of € 375.000 will be in the threshold of

€ 395 .000 and no UK Inheritance tax would have been payable at all!

A much heard alternative is to hold the Spanish property through a Spanish Limited Company (S.L.). This will certainly serve the purpose of escaping Spanish IHT, but when the property is sold, not only 35% Spanish corporate tax is suffered, but the remainder will charged with UK Capital Gains Tax.

If the shares in the company are sold and not the property itself, then CGT applies to assets that you own directly and that are situated abroad just as it does to assets in the UK, such as shares in a company that is registered outside the UK.

If you contribute your existing property in a S.L. you have to pay 7% stamp duty on the actual value of your villa or apartment. Only in the situation when you make these arrangements when you have just bought the property and directly transfer of title of your property to the S.L. you may pay the stamp duty only once: when you buy a property in your own name you also suffer this 7%.

To the category fairytales you can add the often heard solution not to report the decease of the owner of the property. This falls in the same category as underreporting the value of the property and many more variants of these kind of ideas.

As a result of the continuing integration in Europe, the increasing mutual exchange of information, together with the sophisticated computerization of the Spanish Internal Revenue the rope that civilised countries call TAX will tighten further. Tax fraud will be heavily punished in Spain. It would be highly unfortunate when your Spanish dream is shattered after the decease of your beloved partner.

Nevertheless, there are proper and legal solutions to reduce the Spanish Inheritance Tax substantially and even totally. When you want to realize your Spanish dream, be guided professionally, preferably by a legal adviser or tax lawyer who is experienced in both Spanish and British circumstances.

Piet-Hein Crena Uiterwijk,

Chartered Public Accountant and International tax advisor

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