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Don't let your Dream Home get swept away by Spanish IHT

By Malcolm Roach M.I.C.M - Wed 12th Sep 2012

Most owners are not aware that their beneficiaries and their estate may have to pay Inheritance Tax both in their country of domicile and in Spain. Spanish law dictates that the beneficiary of your estate must pay tax on the amount that they inherit. The level of tax payable is not a fixed rate and is determined by the relationship to the deceased, their residency status and their existing wealth in Spain. In addition the estate of the deceased could be liable to pay Inheritance Tax in their country of domicile. For example if the deceased was UK domiciled and had worldwide assets in excess of 325,000 then the Estate could also be liable for Inheritance Tax at 40% payable in the UK.

What are the options to minimise the liability ?

Unfortunately it is common practice for lawyers and tax advisers who are not conversant with both jurisdictions to advise based on their own knowledge and this is often insufficient. We have known of cases in the past where property owners in Spain have been advised to prepare a Spanish Will to avoid the tax. In fact this does not avoid any tax and it is unnecessary to have a separate Will in Spain. The tax is paid by the person inheriting the asset and therefore the existence of a Will does nothing to minimise this. There are also times when the existence of a separate Will in Spain complicates matters and increases legal costs. It is vitally important that all British owners of Spanish property have a UK Will dealing with their worldwide assets and therefore no other Will is required in any other country.

Another misconception is that by simply taking out a mortgage on the property it will reduce the tax liability on death. It is true that the value of the asset will be reduced by the amount outstanding on the mortgage however, the Banks often insist that life policies are taken out which pay off the mortgage on death and the beneficiaries are back to inheriting the whole of the unencumbered property. Even if there is not a life policy then there is a substantial debt outstanding which will have to be paid before the property can be transferred.

Finally the most dangerous option that is put forward is to transfer the property to your children or beneficiaries now. The Spanish tax is payable not only on the inheritance of a property but also the gifting of a property so the tax would be paid sooner rather than later. Also once the property is in the names of your beneficiaries then you have to be able to trust that they will not dispose or charge your asset and leave you homeless. Issues of insolvency, divorce and your beneficiary pre-deceasing you can also add complications to what appeared to be a simple transaction.

At Wincham our solution has been tried and tested for many years and we are constantly updating our processes to ensure that the advice we give is in line with current legislation both in Spain and the UK. Our business is expanding and we have recently opened an office to provide assistance for Spanish Property Owners who originate from Belgium, Luxembourg and the Netherlands.

The Solution :

Quite simply you invest your Spanish property into your own UK Company (which we can supply) of which you will be the Director and shareholder and have total control. Contrary to popular belief there would be no 7% Property Transfer Tax payable on this transaction. Our method enables you to utilise Spanish legislation to conveniently own and maintain your home within a corporate structure in the most tax efficient way. Although the use of an off shore Company creates an additional 3% tax burden each year, the UK is not classed as off shore and in line with EU treaties. Spain must provide UK Companies with the same benefits and opportunities that they allow their own Companies and cannot charge the 3% tax.

Comment on this Blog

Dear C.Shaw, Most of the fractional ownership schemes we have come across do use UK Limited Company ownership as the method to offer part ownership in the Spanish property. You can have shareholders of a UK Company who all pay toward the total ownership of the property and the Directors of the UK Company manage the property bills and utilities. We do many Spanish property purchases for our clients in this method and the UK Company can also be re-sold in this way.
Mark Roach, Wincham Consultants Ltd - Sun, 16th Sep 2012
Can this scheme be used to purchase a share in a fractional ownership property ?
C Shaw - Sat, 15th Sep 2012

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