It is said that there are two things certain in life: death and taxes. Up until the last few years those taxes appeared especially high for non-residents in Spain who were inheriting property in the country.
The European Court of Justice has recognised the unfairness of Spain’s different rates of inheritance tax for residents and non-residents, which ultimately led to the Spanish authorities streamlining the tax liabilities faced by residents and non-residents alike. But the hangover of getting a raw deal in terms of inheritance tax still lingers for many expats and foreign investors in Spain.
With that in mind, it seems only natural for those who own properties in Spain to want to limit the inheritance tax liabilities of their loved ones by any means possible.
Of course, no tax regime is without fault and there are certainly loopholes to be found if you examine tax legislation rigorously enough. So you can forgive a canny investor in Spanish property wanting to limit the amount of tax that will be due on his or her death estate. But individuals actively entering into certain schemes or practices to make these savings should be alert to the fact that the Spanish tax authorities are closing in on arrangements specifically designed to evade Spanish inheritance tax.
Find out more about Spanish probate
Why do some recommend buying property in Spain through a limited company?
One such ploy involves buying a property in Spain using either a UK limited company, or purchasing a Spanish property as an individual and then transferring the ownership to a UK limited company. The apparent logic behind this tactic is that if one of the owners of the company passes away, any beneficiaries will inherit shares in the UK limited company with the possible benefit of Business Relief on Inheritance Tax, if that were to apply. In theory, as the Spanish property in question is situated in a different jurisdiction, this arrangement also serves to free the beneficiaries from any Spanish tax liabilities they would otherwise be liable to pay.
What gives this scheme apparent legitimacy is the legion of organisations advertising services which claim to help individuals transition their Spanish properties into the ownership of a limited company abroad lawfully to avoid Spanish inheritance tax – and all for a sizeable fee, naturally. It is a course of action that sounds too good to be true. And guess what, it really is.
Find out more about Spanish property law.
What is the problem with buying a property in Spain through a limited company?
Although owning Spanish property as a foreign company is not unlawful in itself, if you are found to be actively trying to evade your Spanish inheritance liabilities by using this practice it most certainly will not be tolerated. This has been confirmed by the Sub-directorate General for Taxation (SG de Impuestos Patrimoniales, Tasas y Precios Públicos), by way of binding consultation number V3350-13 of 12 November 2013, which leaves no doubt that it is unlawful to transfer Spanish property into a UK limited company, if the aim of the transfer is to avoid Spanish inheritance tax.
In fact, if you are found to have arranged a purchase or transfer of this type, regardless of whether you do so as an individual, or by way of an organisation purporting to do so lawfully on your behalf, your actions will most certainly amount to tax evasion in Spain. In the most serious of cases, an individual embarking on this course of action could be convicted and receive a sentence of imprisonment, as well as a hefty fine, if the tax evaded is over €120,000.
In light of this, why then are there still organisations still operating this blatant and unethical tax evasion scheme, which could land you in serious trouble? The motivator, undoubtedly, will be the fee they receive from advising you in this way, and the hope that the Spanish authorities will never find out.
But how would the Spanish authorities know that there was an inheritance tax liability on a property registered in the name of a foreign company, I hear you say? Well, they would know quite easily. Since 2010, and in a bid to prevent money laundering, the Spanish tax agency demands the names of all shareholders and other beneficiaries owning or controlling at least 25% of a company (Spanish or foreign) when that company purchases real estate in Spain. What this means is that major shareholders and beneficiaries of foreign companies with interests vested in Spain are easily identifiable – and therefore taxable – by the Spanish authorities. Attempting to evade tax in this manner is therefore, futile.
Find out more about business in Spain.
Buying a property in Spain - next steps
If you are about to embark on a major financial decision it is essential for you to obtain independent financial and legal advice to ensure that you are making business decisions that are beneficial to you and above all lawful. In matters of inheritance tax, it pays to get the right advice early rather than to be in bad company.
If you are considering buying property in Spain and you are concerned about the potential impact of inheritance tax upon your estate please contact us on 020 3478 1420, by email at email@example.com or by completing our contact form.