When you inherit a property in Spain, there is a high chance you must pay inheritance tax. This tax is based on the inherited property value and its location.
Read on for how to calculate your inheritance tax in Spain, and all the ways you can lower the tax rate for yourself.
You already know that if the property is located in a popular area, the value of the property you inherit could be very high. On the other hand, if it is located in an agricultural area, the property’s value could be very low.
Your inheritance tax in Spain is based on the value of the property you inherit, in addition to a few more factors.
Calculate Inheritance tax in Spain with the following:
- the value of the property,
- the family relationship the heir had with the deceased
- … and the inheritance tax rates in the region where the inheritance was received.
The amount of tax you have to pay also is influenced by the property’s location. Besides the type of area, the value is also influenced by the Spanish autonomous region where the property is located. This is because Spain has many autonomous regions and communities, and each has its own approach to taxes. All in all, this makes taxation in Spain challenging.
To begin, you must pay inheritance tax even if you do not inherit the entire property. So, if your parents leave you a house and you rent part of the property, you will still have to pay inheritance tax on the home’s value, even if you do not immediately inherit it.
Next, the Spanish federal and regional governments impose a higher inheritance tax than many European Union countries. For example, if you inherit a property in France, you don’t pay inheritance tax. If you inherit a property in Spain, however, you will have to pay an inheritance tax. And that tax can be as high as 32% of the estate’s value (plus any other assets owned by your relative).
If you plan to leave a Spanish property in your will, it is vital to understand the inheritance tax in Spain to plan your estate. This will allow you to determine whether it is better to leave your property to your family members, or to sell it to pay the tax.
The Spanish government calculates inheritance tax based on the property’s value and other assets owned by the person who passed away.
These additional assets include:
- Other real estate
- Bank accounts
- Insurance policies
- Pension plans
How Inheritance Tax Works in Spain
Once calculated, inheritance tax in Spain works very similarly to any other tax.
The first rule is to determine the event that makes the accrual. This depends on the tax residency of the receiver.
- If the receiver is a Spanish tax resident, the Inheritance Tax is independent of where the property is located.
- If the receiver is not a Spanish Tax resident, Inheritance Tax is paid if the property is located in Spain.
The inheritance Tax return must be submitted within six months of death.
After this, you must determine the inheritance value according to the property’s “actual value”. Then, you can deduct the property’s debts and mortgages from the taxable value.
Some regions have additional reductions on the “taxable base”, or amount taxable. This deduction depends on the family relationship with the deceased or the type of property. For instance, when the deceased’s spouse inherits their habitual residence, the Inheritance Tax-able amount can be reduced up to 95%. However, there are certain requirements you must meet.
How Much Inheritance Tax in Spain Could You Pay?
Once you determine the property’s taxable value, the corresponding inheritance rates will apply. The government divides the value into value brackets using progressive tax rates, so the higher the value bracket, the higher the tax rate.
These depend on every region. For instance, it can go up to 31% of the property’s taxable value in Catalonia for the value bracket above €800,000.
Once you have determined the Inheritance Tax, there are some tax breaks. Most regions reduce the tax liability by 99% if the heir is the child or a spouse of the deceased.
Therefore, you will pay only 1% of the tax liability. Furthermore, suppose you have already paid taxes in another country on the inheritance received. In that case, you will be able to reduce the Spanish inheritance tax liability with the taxes already paid abroad, within certain limits.
Ways to Reduce Your Inheritance Tax Bill on Property in Spain
If you inherit a property in a popular area, there are ways to reduce the inheritance tax you will have to pay. For example, renting the property you inherit can help you keep the value of the property low.
Renting a property out can also help you reduce the property’s value if the house is located in an agricultural area. Finally, you can choose to live on the property at the same time and still profit from tax reductions.
- Make use of tax allowances and exemptions
In Spain, there are tax allowances and exemptions available for certain types of assets or for specific family relationships. For example, spouses and children may be entitled to a higher tax-free allowance, and there may be exemptions for family homes or certain types of business assets.
- Plan ahead and consider making gifts
One way to reduce your inheritance tax bill is to gift assets during your lifetime. This can be particularly beneficial if the recipient is a close family member, as there may be reduced tax rates or exemptions available.
- Consider setting up a trust
A trust is a legal arrangement where assets are transferred to a trustee to manage for the benefit of one or more beneficiaries. Depending on the structure of the trust, it may be possible to reduce or avoid inheritance tax.
- Seek professional advice
Inheritance tax planning can be complex, and the rules can vary depending on the region of Spain you are in. It is therefore advisable to seek professional advice from a tax advisor or lawyer who specializes in inheritance tax planning.
Ways to Reduce Your Inheritance Tax Bill on a Business in Spain
If you inherit a business, you can choose to keep the business running. However, if you decide to shut down the company, you may be able to reduce the amount that you have to pay in inheritance tax. First, sell off some of the business’s assets. For example, you can sell off some of the business’s furniture (and other assets) to reduce the company’s value and keep the tax amount down.
- Take advantage of tax incentives
There are certain tax incentives available in Spain that can help reduce the inheritance tax on a business. For example, there may be tax deductions available for the value of certain business assets, or for the value of the business if it meets certain conditions.
- Consider a family business exemption
In some cases it’s possible to take advantage of a family business exemption. This can reduce the inheritance tax on the business. The conditions vary depending on the region of Spain you are in. Most of the time, it requires that the business has been in the family for a certain period of time and that it continues to be run by family members.
- Plan ahead
You should do your Inheritance tax planning well in advance, and it may involve restructuring the ownership of the business or transferring ownership to family members or a trust. This can help to reduce the value of the business that is subject to inheritance tax.
- Seek professional advice
Inheritance tax planning for a business can be complex and may require the advice of a tax advisor or lawyer who specializes in this area.
It’s worth noting that inheritance tax rules change over time. Therefore, it’s important to stay up-to-date on the latest developments as they come out.
Final Words: Planning for your Estate Early
Before you inherit a property in Spain, you need to understand the inheritance tax in the country. This will help you plan for your estate. You can also find out more about inheritance tax in Spain by visiting the Spanish Ministry of Economy and Competitiveness’ website.
The best way to navigate succession taxes while living in Spain is to work with a knowledgeable tax lawyer.
Lexidy’s tax experts help our clients understand their taxable income and capital gains. This ensures our clients only pay the correct tax. Remember that tax rates will vary depending on factors like residency in Spain, worldwide assets, marriage status, and Spanish sourced income.
Submit the form below with your unique circumstances and our expert team will reach out to make sure you are confident about what to do with Spanish Inheritance Tax, or any other legal query.