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Some thoughts on the future of Spanish ISD (IHT)

By Jaime Vives - Thu 17th Mar 2011

I read with interest recent articles in the press on the future of IHT and the principal that owning a Spanish property in a Spanish SL Company is expensive to set up and expensive to maintain.

The cost of setting up would be in the region of 2,000€ and you would need to invest 3,006€ capital. You would then have the cost of transferring the property into the SL company and the annual costs would be around 1,500€ per year. There is a further sting in the tail if the company is set up solely for the purpose of owning the property as the Director would be required to take out a lease with the company for the rental of the property at market rates. This would incur corporation tax liability at 25% for the company, furthermore; if the acquisition by the company was financed by Directors loans then the company is obliged to pay the Director a market interest rate.

This may seem okay on the face of it as the rent would cover the interest payment. The problem is that the company is obliged to withhold 24% tax, in respect of the interest on the Directors loan to the company, and pay this to the tax office. So this makes this type of ownership extremely expensive. Fortunately, this does not apply to a UK Company and the costs of formation and management are relatively low. It only costs £15 to form a UK Company and roughly the same legal costs to invest the property into the UK Company as into a SL Company.

There are no taxes charged on the UK Company for corporate property ownership in Spain and in the UK there are many benefits of corporate property ownership including no IHT in Spain. The combined annual running cost for a UK company are in the region of £850 and the trade off is that no personal income tax or representation fees in Spain. This has to be the right ownership model for a non-resident of Spain or a resident with inheritors outside of their region.

With regards to any changes to IHT in Spain, this is a matter of speculation. But should the EU force the issue with Spain on this subject then I think the Spanish government will have to do what they have done with CGT and take the tax away from the regions. This will mean that there will be no regional discretion for the local reduction of IHT and the Hacienda will collect any taxes nationally from all residents and non-residents. I cannot see the Spanish government giving away the tax revenue of IHT, a substantial income, nor can I see the UK Government abolishing IHT as in these hard times they will want to retain the income. So my thought is that if there is a change then it will be the residents of the regions who will suffer and pay more taxes not the non-residents.

Many Spanish professionals advise against UK Company ownership of Spanish property and ignore the UK benefits to the inheritors. I very rarely see a Spanish professional give advice on how a non-resident owner can avoid Spanish IHT and would be interested to debate some ideas. There are over 1 million British owners of property in Spain and the majority would come under non-resident rules as their inheritors would be outside of Spain even if they themselves were residents of Spain.

Comment on this Blog

Hi I would like to say that I think this article is written elegantly and well in a complex area, and to bring into line what has happened in the past with Capital Gains tax and the possible future of Inheritance Tax is very candid and true. No one knows what will happen, and we can only advise from today. So Well done Jaime for writing an excellent article.
Darren Carter - Wed, 30th Nov 2011
Excellent comment. A UK company works best for any nationality.
David Goodall - Thu, 17th Mar 2011

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