First published in the Law Society of Scotland's Journal, January 2020, Volume 65, Number 1
Fortunately, over the course of the past seven years the development of the succession and tax rules applicable to Spanish estates favours UK nationals, in both a leave and remain scenario, whether in respect of the UK remaining in the EU, or Scotland remaining in the UK. The administration of the Spanish elements of a Scots estate need not be complex, provided it is approached logically and methodically, like any other aspect of a death estate.
The first issue with which to grapple in the administration of a Spanish estate is the documentation that is required, including documents issued in Scotland and those prepared and issued in Spain. The next phase is to determine the succession law applicable to the estate and the liability of the beneficiaries to Spanish tax. We strive towards a timely realisation of the Spanish estate assets, although beware that it is an art rather than a science, and not for the fainthearted.
Spanish Will or Scots Will
Whereas the clear advice to anyone owning Spanish assets is to make a Spanish Will in respect of the succession to those assets, primarily to ensure a relatively swift and uncomplicated administration of the Spanish elements of an estate, in strictly legal terms on death it is immaterial whether a Spanish Will or a Scots Will applies to the Spanish estates held by the deceased as at the date of death.
Other important documentation
In any event, it will be necessary to determine whether a Spanish Will was made by the deceased. An application will be made to the Registry of Last Wills, an office of the Spanish Ministry of Justice. On making a Will in Spain, unless a holographic Will or a Will according to Scots law or the law of any other jurisdiction, the notary before whom the Spanish Will is signed (all Spanish Wills signed in Spain, other than holographic Wills, must be signed before a Spanish notary) will report to the Registry of Last Wills the full name and date of birth of the testator, as well as the date on which the will was signed and the name of the notary before whom it was signed.
Hence, the Registry of Last Wills is able to provide the information to anyone sending them a death certificate relating to the deceased, whether or not a Will was made. The certificate of last Will that is received is an essential document in the process of the administration of a Spanish estate. Early application for the document is strongly recommended, as it will determine the basis on which the Spanish estate is to be administered.
A Scots Will may be the only will made by the deceased, or it may revoke all previous Wills made, including any Spanish Wills, or it may apply only to assets outside of Spain. Whatever the case, and whether the estate is intestate or not, a Scottish confirmation will be required to evidence either that a Scots Will has been proved, or that the estate is intestate. A sealed copy of any Scots Will is also necessary. All documentation not issued in Spain will need to be legalised, by having the Hague Apostille attached to it. That will include a death certificate, the confirmation, a sealed copy of any Scots Will (or a Will made according to the law of any other jurisdiction), and a power of attorney signed in Scotland, or elsewhere if more convenient for the signatory, authorising the lawyer with conduct of the matter in Spain to sign the necessary documentation and take the necessary steps in Spain to administer the Spanish element of the estate. Armed with all of that documentation and the certificate of last Will, we are in a position to proceed.
Applicable succession law
According to Regulation (EU) 650/2012, also known as Brussels IV (directly applicable throughout the EU, although it does not apply to the UK and Denmark), the default position is that the succession law applicable to the estate of a deceased person is the law of the country of his or her habitual residence. A clear statement in a testamentary disposition, wherever it was lawfully made, opting for the succession law of the nationality of the testator to apply to the estate, will have just that effect, such that someone from Birmingham may opt for English law to apply to the estate and so benefit from freedom of testamentary disposition, whereas someone from Aberdeen may opt for Scots law to apply and so will be restricted to an extent by legal rights according to Scots law as to how they leave their estate.
Spanish law restricts to quite a great extent the degree to which one can choose to whom to leave one’s estate, as in most of Spain the natural born and adopted children of the deceased will have a right to two thirds of the estate. Hence, if a Scot is living in Spain and makes a Spanish will in respect of their Spanish estate, then unless they expect all of their natural born and adopted children to have a right to a part of their estate on their death, greater than the right that the children would otherwise have by exercising their legal rights according to Scots law, they would be sensible to declare that Scots succession law will apply to their Spanish estate and, indeed, all of their estate, as Brussels IV does not allow for the succession to a death estate to be dealt with according to the succession law of more than one jurisdiction.
It follows that if a Scot dies intestate in Scotland, or having only made a Will in Scotland according to Scots law, no matter where they are living at the date of their death, Scots law will apply to their estate. In respect of an intestacy the default position will apply, as the habitual residence is Scotland, and if only a Scots Will was made, that is a clear statement that Scots law is to apply to the estate, as a Scots Will is governed by Scots law.
Spanish inheritance tax
Having determined who is to inherit the estate, we must prepare to accept the inheritance, but not before we determine the liability to Spanish inheritance tax, as well as any other tax liability that may be generated by an acceptance of the inheritance. Unlike in common law jurisdictions, in many if not all civil law jurisdictions and certainly in Spain, it is the people who inherit the assets of the deceased who will become liable to Spanish inheritance tax. In any Spanish will the testator will name heirs, who are the people in whom all of the testator’s assets will vest on their death. The heirs will be responsible for the delivery to the legatees of any pecuniary or non-pecuniary legacies. The legatees will be responsible for any liability to inheritance tax in respect of the legacies. Each heir will be responsible for his or her own liability to Spanish inheritance tax.
Whether or not the heir is a Spanish resident, inheritance tax in Spain will be payable in respect of the value of Spanish assets received by him or her. There are 17 autonomous communities in Spain, provided for within the constitutional settlement of 1978. Spain devolved to the autonomous communities the power to levy certain taxes, including Spanish inheritance tax. Over the years that have followed, each autonomous community has increased the extent to which the direct descendants and spouses of deceased people can benefit from reductions in the inheritance tax otherwise due. The reductions that apply are the reductions in force in the autonomous community in which the majority of the deceased’s assets are situated on death, or in the case of someone dying while resident in Spain, the autonomous community in which he or she was habitually resident for at least five years before death.
Fairly recent developments
Until a decision of the CJEU of 3 September 2014, Spain allowed the reductions to apply only to those people inheriting assets who were resident in Spain, whether Spanish nationals or otherwise. The effect of the judgment of 3 September 2014 was that Spanish law was amended to allow any residents of the EU or the EEA to inherit assets in Spain and benefit from the reductions previously available only to Spanish residents.
The position has recently shifted even further, as a result of the decision of the Spanish Supreme Court of 19 February 2018. Based on the right of freedom of movement of capital enshrined in EU law, the Spanish Supreme Court and more recently the Spanish Treasury take the clear view that there can be no distinction whatsoever between those inheriting Spanish assets, in terms of the country of residence of those people. It follows that no matter where the people inheriting the estate are resident, the reductions available will reduce their inheritance tax liability in Spain, provided that by their degree of familial proximity to the deceased those reductions are applicable.
Beware – when a beneficiary is not a beneficiary
I have been careful not to refer to those inheriting Spanish assets as the beneficiaries. In the absence of a Spanish Will which applies to the Spanish assets of a deceased’s estate, it may be that confirmation has been granted in Scotland, whether on proving a Will, or in respect of an intestacy. In that case, according to Scots law the estate will vest either in the executors named in the Will (to the extent that they do not renounce or reserve their power), or the personal representatives who extract the confirmation. As a result, there is a possibility with cross-border estates that (inadvisedly, subject to the circumstances of each case) the executors or the personal representatives decide to enforce their authority and accept the inheritance in Spain, with a view to distributing the net estate to the beneficiaries, as they would do normally in Scotland.
It is very important to note that the Spanish tax agency will view any such transfer of title as an acceptance of inheritance directly by the “beneficiary”, whether or not it is plain on the face of the record that the executors or the personal representatives are not beneficiaries, but merely trustees of the legal interest in the estate holding the beneficial interest for the beneficiaries.
Spanish law will give effect to the law of trusts of other jurisdictions if a foreign court has ordered it (to wit, Scottish confirmation), hence it will allow either the executors or the personal representatives to register the assets in their own names, but it will not accept that the transferees in that context are merely holding those assets on trust, as the law of trusts per se is not recognised in Spanish law. The effect can be disastrous. For example, in Andalusia each child of the deceased and the spouse of the deceased is entitled to inherit up to €1 million free of inheritance tax. If an executor with no familial connection to the deceased were to decide to register in their own name an estate with a value of €2 million in circumstances in which the only two beneficiaries of the assets in equal shares were both natural children of the deceased, the tax payable by the executor would be almost €1.3 million, whereas if the children were to inherit directly each child would have a liability to Spanish inheritance tax of nil. It is important, therefore, to receive expert advice before administering a Spanish estate to avoid unnecessary tax liability.
The scenario described in the previous paragraph can be avoided by careful pre-death and/or post-death planning. However, in circumstances in which the beneficiaries of an estate are at odds with each other and cannot reach an agreement as to the administration of the estate, it may be necessary for the executors or personal representatives to bear the liability to tax in any event in order to discharge their duties according to Scots law.
Acceptance of the inheritance/declaration of heirs
The final step in the administration of a testate estate will be to accept the inheritance and register the assets in the names of those who have accepted it. A document is prepared that contains information as to the identity of the deceased, the date of death and the last Will of the deceased, as well as the names of those who will accept the inheritance, the assets to be accepted, the debts to be accepted, and the values of the assets and debts as at the date of death. That document will be signed before a notary in Spain, either by those accepting the inheritance, or by those acting on their behalf by way of a power of attorney. Registration of any realty in the names of those inheriting will follow, as well as the transfer of any other assets into the names of those benefitting from the deceased’s Spanish estate, in the proportion in which they are to inherit it.
In respect of intestate estates there may be another intermediate stage in the absence of a Scottish confirmation, that being a declaration of heirs, which sets out the names of those with an interest in the estate and who are then the heirs who accept the inheritance. That scenario is common where, although the deceased was a Scot who died intestate, the deceased did not have any assets in Scotland, or at least none of sufficient value to warrant an application for confirmation in Scotland.
Realisation of Spanish assets
As indicated at the beginning of this article, the realisation of Spanish assets is not without difficulty. Selling Spanish realty is a longwinded and costly process. Properties can take from six months to sell, unless priced very keenly. The Spanish banks have an unnatural reluctance to release funds to beneficiaries, even when all documentation has been signed and all taxes paid. These are issues with which my colleagues and I need to grapple daily, avoiding the pitfalls often encountered by those unfamiliar with the administration of Spanish estates.