1) How Modelo 720 affects inheritance tax.
This is a change in working practice and enforcement of existing law rather than a change in the law.
Since December 2012, there has been a requirement on Spanish tax residents to declare all overseas assets to the hacienda (the Spanish tax office), if the value of those assets exceeds €50,000. In addition any change in the value of overseas assets by €20,000 or more must be declared annually.
The effect of this is that whereas pre Modelo 720, non-Spanish assets received by a Spanish tax resident as part of an inheritance were largely ignored by the hacienda now they have to be declared as part of the inheritance and taxed accordingly.
There has always been an obligation to declare to the hacienda and pay tax on any inheritance received by a Spanish tax resident regardless of from whom and from where the legacy came from. Spanish inheritance tax is paid by the recipient not the estate. So a legacy from a great Aunt who had never been to Spain in her life would be liable to Spanish inheritance tax if received by a tax resident of Spain. This also applies to non-Spanish assets received as part of an inheritance which includes Spanish assets. The most common example is where the spouse receives all the assets of the deceased spouse in and out of Spain.
Previously the common practice was not to include non-Spanish assets in any inheritance declaration for inheritances which included assets in and out of Spain. The Spanish tax office showed little interest in collecting inheritance tax on non-Spanish assets even though there was a statutory obligation to pay it.
Since Modelo 720, this has changed. The recipient now has to declare the assets in the Modelo 720 and state how they came into possession. This in turn will lead to a tax demand (and possibly a fine) from the hacienda if the receipt of the inheritance is not already declared.
One solution to avoid this problem and additional tax burden is to restructure the wills so that non-Spanish residents are the recipients of non-Spanish assets. This could be for example the children of the testators or even a discretionary trust containing the surviving spouse and other people (who are non-Spanish tax residents) as potential beneficiaries.
2) EU Regulation 650/2012
This affects the inheritance law which applies to the estates of people who die after 17th August 2015.
Basically pursuant to Article 21 of the Regulation, as from August 2015 the applicable law to the estate of an EU national (other than those resident in those countries listed above) will be the law of the country of their residency. A UK national resident in Spain would therefore have Spanish law applied to their estate. Under Spanish law (as applied to Spaniards) a testator must leave two thirds of their estate to their children. Indeed even the parents of the deceased are obligatory heirs to one third of the estate if there are no children.
Any residents of Spain who die intestate will have Spanish intestacy rules applied to their estate regardless of their nationality. This means the spouse will not inherit the whole estate if there are living children or parents of the deceased.
However, Article 22 allows someone who is the national of one European State but resident in another to elect to have their national law applied to their estates. This for UK nationals means much more flexibility in the beneficiaries whom they can choose. The most logical document to use to declare this election would be in a Will and article 27 would allow a declaration in a Spanish form Will that “English” law applies.
Article 83 provides for transitional provisions. The most important of these under Art 83.4 means that if a person made a Will before 17th August 2015 which was compliant with the law that the testator could have chosen (i.e. their national law) then they will be deemed to have elected this law to apply to their estate. This means it is not likely to be necessary in most cases for clients to amend their wills for Spanish assets. However this Article won’t apply to wills made after August 2015 so any will made from that date on needs to have the declaration of applicability of national law in order for that law to be applied to the estate.
3) Commission v Spain Case C-127/12
The European of Justice on 3rd September 2014 declared that the Spanish inheritance tax system is unlawful. It held that the system of treating residents differently to non-residents when it comes to inheritance tax is discriminatory and contrary to European law.
Most inheritance tax allowances in Spain are regional. Previously these allowances were only applied when both the deceased and the beneficiaries are officially resident in Spain. In the case of residents the tax rules of that particular region applied. If either the deceased or the beneficiary is non-resident then the State inheritance tax rules applied. This includes cases where Spanish residents receive an inheritance from outside of Spain. This meant that non-resident beneficiaries often paid much more inheritance tax than residents would.
There is a vast difference between the state inheritance tax rules and the regional allowances. Several regions including Madrid, the Balearics, Valencia and Murcia have virtually no inheritance tax between spouses or between parents and children. Others, principally those with socialist administrations, have less generous allowances, nevertheless with professional advice the reductions can be utilised so as to significantly lower or eliminate the inheritance tax burden. For example Andalucia allows a gift to a spouse, child or parent of up to €175,000 tax free. This is an all or nothing allowance so a gift of €176,000 would be taxable on the full amount.
In a recent Official State Bulletin (BOE) On 28th November 2014 changes have been made to the existing inheritance tax law (Ley 29/1987, of 18th December 1987). As from 1st January 2015, the same allowances and deductions which apply to residents will apply to the inheritances where either the deceased or beneficiaries were non-resident and also to the inheritance (by residents) of assets located outside of Spain. The allowance applied will be that of the autonomous region where the deceased had the majority of their assets.
This is very good news even for residents if one or more of their children or grandchildren who are beneficiaries in their will is a non-resident of Spain. It means that in many cases wills can be restructured to reduce or often eliminate Spanish succession tax. Non-resident children, grandchildren and even parents can be added to the wills as beneficiaries each with the €175,000 allowance. Sadly it does not apply to residents of non-EU countries regardless of nationality.
Jon Sutton is a Solicitor at De Cotta Law, whose firm specialises in Wills & Probate. He is available to meet clients at the inland office of De Cotta Law at Sierra Chica, Coín or at the offices in Mijas Costa. To book an appointment call 00 34 951315161 or email jonsutton@decottalaw.net. For more information you can find us on the internet. Our website address is www.decottalaw.com .
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