What you need to know about inheritance and gift taxes in Spain

Issues arising when an inheritance or a gift involves non-resident individuals.

Under Spanish regulations, mortis causa transfers and inter vivos gifts are subject to inheritance and gift tax (“IGT”). Spanish resident individuals are subject to IGT on their worldwide assets acquired, while non-residentsare subject to this tax exclusively on their assets in Spain or rights that may be exercised in Spain.

General rules

The taxable base of the recipients (heirs, legatees and donees) is the net value of the assets received. Burdens and encumbrances imposed directly on the assets, which effectively reduce their value or capital (such as pensions and annuities), duly documented debts (mortgages, pledges, local taxes) and specific expenditures (including medical costs and burial expenses) would be deductible.

IGT in Spain is regulated by the state and the autonomous regions. Act 22/2009 establishes the mechanism to determine whether state or autonomous region legislation applies in each case. Generally, the legislation of autonomous regions is more favorable to the taxpayer, as it usually establishes a higher allowance applicable to close relatives.

In relation to mortis causa transfers, the applicable law will be the law of the autonomous region where the deceased had his habitual residence at the time of death. If the deceased was not a tax resident in Spain, state legislation would apply.

While there are few tax reductions under state regulations, autonomous regions usually have high allowances. For example, in the autonomous region of Madrid, there is a 99% allowance on mortis causa transfers between parents and children. Thus, if the deceased had his habitual residence in Madrid, tax-resident heirs would only pay IGT of 1%, while non-resident heirs would pay the full amount of IGT for the same assets received.

Regarding inter vivos gifts, the applicable legislation depends on the beneficiary’s tax residence. If the donee is a resident in Spain, the legislation of the autonomous region where the donee has his habitual residence[1] will prevail. However, a specific rule applies if the assets transferred consist of real estate located in Spain. In this case, the applicable law would be that of the autonomous region where the real estate is located, but if the real estate is located abroad, Spanish state law would apply. Likewise, if the donee is not a resident in Spain, state law would apply (regardless of the nature of the Spanish assets or rights donated).

Tax rates

Under Spanish state law (applicable when the deceased is a non-resident or when the heirs or beneficiaries are non-residents in Spain), the applicable tax rates for determining the final tax liability for IGT are progressive, ranging from 7.65% to 34% (in cases where the taxable base exceeds €797,555.08)

[1]   For this purpose, anti-fraud provisions consider that donees’ tax residence is where they had their habitual residence in Spain for most of the time within a five-year period.