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1. Why would I have to pay Spanish Inheritance Tax?
If you own a Spanish property when you die your beneficiaries will need to go through probate and pay the relevant taxes before they officially own their portion of the property.
In Spain it is the recipient that is taxed and not the Estate which means each beneficiary has to probate individually. To complicate matters further there are different rules for recipients domiciled in Spain who are liable to pay taxes to the local Government. Non-Spanish domiciled recipients pay any taxes due to the National Government. It is to be noted that a Residencia does not necessarily mean that you are deemed to be domiciled in Spain.
Why should I bother?
This is a question that we are often asked! Many people have a mental blockage when it comes to planning what will happen to their assets when they die. This is understandable as we all think, ‘It won’t happen for ages’ or ‘Why bother as I will be dead anyway’, at times. But the fact of the matter is that we WILL all die one day and if we have not made provision then our beneficiaries can be left with one unholy mess to sort out at a time when they really could do without the added burden of debts relating to inherited assets, especially when the tax relates to the assets owned by ones spouse.
In reality it is very necessary that we do sit down and ensure we have things boxed off so that when we do die our Estate is easier to deal with and that is why Wincham Investments Limited have devised methods to assist Spanish Property owners to structure their assets in such a way that their beneficiaries will inherit their Spanish assets with the minimum of delay, no cost in taxes in Spain and with no necessity to deal with Spanish Wills, Lawyers or Notaries.
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2. But I already have a Will in both Spain and the UK?
This is definitely a start but neither will protect your property against Spanish Inheritance Tax. The Wincham product allows your beneficiaries to inherit your Spanish property without the need to probate a Will in Spain so, if your only asset in Spain is your property then you will not need to have a Spanish Will.
Spanish law does not allow for your partner in marriage to automatically inherit your half of a jointly owned property and in all cases the beneficiary will need to probate the Estate and pay Inheritance Tax on the asset before the asset can legally pass into the new owner’s name(s). To make matters worse any bank account held in the deceased’s name, or jointly, is automatically frozen until the Estate has been probated and all necessary taxes have been paid. The taxes cannot be paid from the deceased’s assets in Spain and it can take between 6 months and 2 years to complete the probate process and the transfer of the deceased’s assets to the beneficiary.
Inheritance tax is calculated using different formulas dependant on the relationship of the person to inherit with the deceased. For instance if you and your partner are not married then the tax will be significantly higher than if you are. Children of the deceased also pay different amounts of tax dependant on their status; unmarried partner’s children from a previous marriage, that have not been legally adopted, pay more tax than children who are the direct descendant of the deceased. As you can see the whole situation is fairly complicated and is made even more problematical as it is not the Estate that is probated but each persons part of the Estate that they are due to inherit. This means each person is individually required to go through probate in order to obtain their share of the property at a cost in the region of 5,000€ for lawyers fees plus the Inheritance Tax that is due to be paid. The end result can be a very costly affair and the property cannot be sold until all beneficiaries have completed the process.
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3. My wife and I are both residents in Spain so surely this does not affect us?
But what about the beneficiaries when you have both died? If your contingent beneficiaries do not live in Spain then they will all need to go through the process of probating their part of your Estate. You may be resident in Spain but domiciled in the UK and in either case your beneficiaries will need to probate in Spain. As previously stated Residencia does not necessarily mean that you are domiciled in Spain.
OK so what can I do to simplify things?
The simple answer is that you can invest your property in a UK Limited Company.
Why not a Spanish Company or an Offshore Company?
Neither of the above options will provide the same benefits. Investing the property in a Spanish company will still mean that on your death your beneficiaries will have to go through the probate process and pay the relevant Spanish Taxes. Investing the property in an Offshore company does not give you any benefit either as the Wealth tax for offshore companies is prohibitive.
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4. I have been advised that I should put part of the property in my Son and Daughter’s name – is this a sensible option?
Not really. Whilst this can legally be done, there are inherent risks. Once you have placed the property in their names it cannot be reversed and, if the recipient is involved in matrimonial issues or Insolvency issues, it could put their part of the property at risk. It may also create issues in the UK in respect of gifting to family members.
This method will still leave the owners of the property with the requirement to probate should any of the owners die in the future and this in turn would leave them liable to pay Spanish Taxes at the time of probate together with all the other issues previously mentioned.
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5. I was also advised to take out a 100% mortgage on the property should I consider this?
Some advisors do recommend that you take out a 100% interest only mortgage and this is mainly that they are motivated by the commission to be earned. Whilst it is true that Spanish IHT is only paid on the un-mortgaged portion of the property you will have to carry the burden of interest payments for the duration of the loan and ultimately leave it to your beneficiaries.
It is usually recommended by the Broker that you place the Equity Release money on deposit to counteract the interest payments. There is little point in following this route in Spain as your deposit monies would be frozen on your death and also the interest to be gained will always be less than the interest paid.
In some instances the Equity Release could be used to discharge a mortgage in the UK which, today, bears a higher interest rate than that in Spain. This option could be worth considering as, under those circumstances, it would be saving interest paid in the UK.
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6. So what does the UK Company option do for me?
Once the property is invested into a UK Limited Company it will be owned by the Company which will in turn be owned by the Shareholders of the company which will of course be the original owners of the property.
How does that help when I die?
Once you have invested the property in the company you can leave your share to your intended beneficiaries. All you will need to do is to change your UK Will to state who you want to leave your shares to. When you die it is a simple process to move the share and issue a new share certificate to the beneficiary or beneficiaries after your Will in the UK has been probated. As it is the company that owns the property and the company does not die there is no need for probating in Spain as, in so far as the Spanish authorities are concerned, the ownership of the property remains exactly the same. The end result is no probate in Spain, no taxes in Spain and a smooth and seamless transfer of the ownership of the property.
Are there any other benefits?
Yes there most certainly are and I will explain the most important ones below.
Wealth tax
As a non resident living in Spain you will be required to pay Wealth Tax annually based on the value of the property. Once the property is invested in the company this no longer applies. By law UK Limited companies are not liable to pay Wealth Tax in Spain.
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7. Capital Gains
In Spain the standard rate of Capital Gains Tax ( CGT) is 18% of the increase in the value of the property over the original declared purchase price of the property and this is payable on a declaration basis. As many Non-Spanish residents sell up and leave Spain without paying this tax the Government has provided for a With Holding tax to be retained by the purchaser based on 3% of the sale value. This tax has then to be submitted to the tax office by the purchaser. It is then incumbent on the seller to submit the required documentation to recover this tax if it is not due or the pay the difference.
It is a fact that, in the past, many people under declared the value of their property, at the time of purchase, to reduce the liability of purchase tax (normally 7%) and Land Registry fees of 1%. This became known as a Black Money deal where large sums of unrecorded cash would pass between the purchaser and the vendor. Obviously this is illegal under the new International Money Laundering Regulations (MLR) and leaves the purchaser open to investigation as to the origin of the funds. Whilst this method would save 8% of the Black Money in tax it leaves the purchaser with the prospect of paying CGT in both Spain and the UK when the property is sold. In this event if the purchaser did not wish to deal in Black Money the full value of the property would be declared and this would result in CGT being payable by the vendor on the difference between the original declared purchase price and the sale price. UK citizens may have to account for CGT in Spain and the UK and the transaction, in any event, should be submitted on an Annual Tax Return.
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8. What if I want to sell the property – will the fact that it is in a company be a problem?
Not at all – in fact it is actually beneficial to both the vendor and the purchaser if the property has been invested in a UK Limited company.
How does that work?
Normally when you sell a Spanish property the purchaser has to pay approximately 10% of the value of the property in taxes and lawyers fees and there is a 3% retention and Plus Valia Tax which is held by the buyer and is paid to the Spanish tax office to offset against the potential Capital Gains Tax liability of the vendor.
On a property valued at 200,000€ this would mean the vendor would loose 6,000€ of the sale proceeds and the purchaser would have to pay an additional 20,000€ in taxes and lawyers fees. By purchasing the company that owns the property none of this would be necessary. All that is needed is a simple Sale and Purchase Agreement which states that the purchasers agree to purchase the company at the agreed price of the property and at the time of the purchase the purchase proceeds will discharge any existing mortgage on the property and repay the Shareholders loan account.
As mentioned previously this loan account will equate to the original investment value as specified at the time the property was invested into the company plus any subsequent Shareholders Loans to meet the running costs etc. At the time of the sale the new owners of the company will be appointed as Directors and Shareholders and the existing Directors will resign. This provides for a quick and seamless transaction which does not even require that the vendor or the purchaser visit Spain to complete the transaction if they do not wish to do so.
Once the new Directors and Shareholders have been appointed they will continue to benefit from owning the property in a UK Limited Company in exactly the same manner and will be able to instruct their lawyers as to whom they wish to leave their shares in the company to in their UK Will.
It would be necessary to undertake property searches in Spain to identify that the asset is unencumbered and has all legal licences. It is also necessary to undertake due diligence in respect of the UK company to ensure that the company is in good order.
What if I want to sell the property – will the fact that it is in a company be a problem?
In the unlikely event that this happens it is still possible for the property to be purchased from the company in the normal manner.
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9. Can I limit the effect of Death Duties on my Estate in the UK by investing my property in a UK Limited company?
Yes this is possible.
You could appoint your primary beneficiaries as Directors of the company while giving them no authority to act at this time. You could also give your beneficiaries Share Options which would enable them, at a future date, to acquire a controlling interest in the company, with your agreement. This would have the effect of transferring the increased value of the property without tax being payable at that time. You could also sign a Deed of Gift which you can lodge with your Will, Gifting your Loan Account in the company to your beneficiaries. This would keep the control of the Loan Account and the shares with you until such time as you wish to pass them over to your beneficiaries. There may be some tax payable if you die within 7 years of this Gift. You are, of course, left with the option to remove the Directors or destroy the Deed of Gift, at your discretion, at any time. This option will allow you to change your mind should your beneficiaries circumstances change in the future, such as Matrimonial disputes, Insolvency problems or family rifts.
This contingency plan may also assist you in the future should you require medical or care home assistance from Social Services. It is well known that Social Services require the claimants Estate to be realised in order to provide residential care and that there are only modest limits on the assets that can be retained by the claimant. It is also well known that Social Services will, in many cases, sequestrate a foreign property to meet the claimants commitments and it is, therefore, only sensible to structure your assets to ensure that this issue is no longer a problem. Following this option the asset is owned by the company and your beneficiaries could take the controlling interest in the company leaving the asset intact and free from any claims.
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10. If I am looking to purchase a property in Spain can I make any savings?
Yes. It is possible if you have the cooperation of the vendor to invest the property in a UK Limited company prior to the purchase.
This can be done using a simple UK contract provided by Wincham Investments and our legal team can deal with the Company Formation and all legal matters relating to the investment of the property into the UK Company. The cost of this service is £5,000 including all legal costs, formation costs and the translation of the necessary documentation into Spanish.
The savings to the purchaser would be the 7% Purchase Tax and the usual legal costs which normally equate to 3% of the value of the property.
The savings to the vendor is the 3% Withholding Tax. The costs of investing the property into the UK Limited company would be borne by the purchaser.
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11. Is it true that shares in a UK Private Limited Trading Company are free from Inheritance Tax on the death of the Share Holder?
In terms of inheritance tax in this scenario, then the recipient is technically liable to IHT but subject to business property relief .There are a number of rules surrounding the circumstances , however, the key one being that the company to which the shares relate must have been or be a trading company (as opposed to an investment company for example).
Assuming the business property relief is applicable which would seem likely in this scenario then there would be no IHT applicable.
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