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Sun, sand and Spanish IHT

Private bank Rothschild explains Spanish inheritance tax and how property owners can avoid potential bills.

Most British owners of Spanish property own holiday homes or property investments and are not resident in Spain.  However, some British people have bought property and moved to Spain permanently or semi-permanently and many of these have chosen to become resident in Spain, that is electing to spend 183 days or more a year in Spain. One issue that often gets overlooked by purchasers, estate agents, property developers, and even Spanish lawyers and notaries is the unexpected tax consequences, and specifically potential inheritance tax (IHT) consequences of buying property in Spain.

Spanish IHT affects all property owners in Spain, not just residents, and furthermore it does not operate in the same way as UK IHT. Firstly, in contrast to the UK, Spanish IHT is not calculated on the total value of the deceased’s estate but, rather, on the value of the share actually received by each beneficiary, and the tax-free allowances are nowhere near as generous as the current £300,000 threshold in the UK.

Secondly, and also in contrast to the UK, there is no inter-spousal exemption to the tax, meaning that in the quite common scenario of a property being owned jointly by a husband and wife, upon the death of one of them, Spanish IHT is levied on the 50% share inherited by the surviving spouse. Finally, all such taxes must be paid within six months of the date of death, otherwise surcharges, fines and late payment interest may apply.  The Spanish tax authorities enjoy a statutory lien on all property transferred by way of inheritance until such time as all taxes due have been paid.

How Spanish IHT is calculated
There are four stages in the process – firstly, the amount of the inheritance is assessed; secondly, the amount of any tax free allowance is deducted depending on which class of beneficiary the inheriting person falls into; thirdly, the amount of tax due is calculated using a published table of IHT rates; and finally, a multiplier is applied to this tax amount depending on the pre-existing wealth of the beneficiary to arrive at the amount of IHT due to the Spanish tax authorities.

The amount of Spanish IHT payable by each beneficiary will depend on the net value of the property actually received, that is, the actual market value of the asset(s) less deductible charges, debts and expenses. Usually, 3% of the net value of the estate is also added to this figure to take account of personal chattels, such as the contents of a holiday home, unless the value declared is higher than this or a lower value for such items can be proven.

Classes of beneficiaries and tax free allowances under Spanish law, beneficiaries are classified into four groups:



IHT rates
Having assessed the net value of the inheritance, each beneficiary calculates the amount of IHT using the table below:



Pre-existing wealth and tax multipliers
Once the IHT amount has been calculated by reference to the above tables, a multiplier is applied to it, based on the pre-existing wealth of the beneficiary and the class of beneficiary as shown opposite:

Double Taxation
Although the double taxation treaty between Spain and the United Kingdom does not include IHT, fortunately it is the practice of the UK’s HM Revenue &
Customs to credit any inheritance tax paid in Spain against UK inheritance tax payable in respect of the same assets, thereby avoiding a double tax burden. For Spanish residents, there are specific provisions in Spanish law to this effect to assist such residents inheriting property from overseas.

Can this be avoided?
The short answer is, yes, with careful planning and advice from a financial and/or tax adviser.

The simple answer is to try to minimise the amount of assets that are exposed to Spanish IHT. Although you may have the funds available to purchase a dream villa outright with monies saved, a mortgage is in fact a very effective way of reducing the total value of their Spanish estate exposed to IHT.

It is possible to buy the Spanish home using a mortgage and use the proceeds of the mortgage to buy an investment that is held outside of Spain.  This investment does not then form part of the Spanish estate, the net value of which is calculated by deducting the amount of the mortgage from the value of the property. The mortgage need only be for part of the house value because of the tax rate tapering. The type of investment bought depends on an individual couple’s appetite for risk; some will wish for something very safe such as a capital guaranteed investment fund, whereas others might wish for something a bit riskier.



This solution may sound both complicated and expensive, but there are specific products available in the market place to deal with this, ranging from off the shelf to bespoke products, which are geared to the clients’ lifestyle needs.  The important thing is to get proper financial and tax advice.

In recent years, these kinds of mortgage product have developed considerably such that the potential IHT mitigation benefits are but one of a long list of
benefits for owners of Spanish property.

Depending on an individual’s circumstances and appetite for risk, a mortgage structured in this way can enable Spanish property owners to make better financial use of their Spanish property by diversifying the money tied up in bricks and mortar into a medium – long term investment, by generating a modest amount of capital release at the time that the mortgage is put in place for property owners to spend as they wish, and by generating an annual income facility from their investment, whilst still, of course, continuing to benefit from future growth in the value of their dream villa in the sun.

For those who propose to live in Spain for more than 183 days each year, the position becomes more complicated as the whole of their worldwide estate would be subject to Spanish IHT, plus possibly UK IHT as well; these people definitely need to get tax advice.