First published in the A Place in the Sun magazine, Autumn 2019 issue.
Over the past 12 months, the Spanish government has made important changes reducing significantly the cost to consumers of borrowing money secured against Spanish property, and equally important changes to the amount of inheritance tax and gift tax to be paid in Spain, irrespective of one’s country of residence.
The cost of borrowing money has reduced
On 16 June 2019 a new mortgage law came into effect in Spain. One of the most interesting changes is the difference in the cost of a Spanish mortgage. In the past in Spain, a mortgage was subject to a stamp duty of between 0.5% and 1.5% of the total potential exposure of the lender, which could amount to up to 1.5 times the principal sum borrowed. The result is that a loan of €100,000 could attract stamp duty of up to €2,250. Together with a Notary’s fee and a fee charged by the property registry, as well as the lender’s arrangement fee, other bank admin charges and a valuation fee, the total cost of borrowing €100,000 could be up to approximately €5,500. According to the new rules, the bank must meet all of the expenses, other than an arrangement fee, and the valuation, which together may total €1,500. The bank must now pay the stamp duty and the Notary’s fee and it can no longer pass onto the consumer its admin charges. Perhaps banks will now build into the total cost of a loan the expenses that they are now having to bear themselves, particularly likely when you consider the heavy financial burden that was transferred to them at the outset.
Inheritance tax has practically disappeared in some areas
In November 2014 a Spanish law was passed entitling any resident of an EU or EEA member state to benefit from the same reductions in inheritance tax as a Spanish resident. Each of the 17 Spanish autonomous communities is free to determine its own inheritance tax reductions, so that in Andalucía a spouse can inherit up to €1 million without incurring a liability to inheritance tax, whereas in Murcia there is a reduction of 99% of the inheritance tax to be paid by the surviving spouse. Prior to 2014 only Spanish residents were entitled to those reductions.
In 2018 the Spanish Supreme Court made three judgments determining that it is unlawful to discriminate against those not resident in the EU and the EEA by effectively increasing the inheritance tax payable by them by virtue only of their place of residence. It ordered that those who had been subject to the tax be compensated in full. Further to those judgments the Spanish tax agency has stated publicly that it will not discriminate against those resident outside of the EU and the EEA, declaring that while the Spanish parliament has not yet passed a law implementing the changes, the Spanish tax agency is giving effect to them.
The result is that anyone who has made payment of inheritance tax, when according to the new rules a reduced amount of inheritance tax would have been payable, may recover any surplus tax paid, provided the tax was not paid more than four years previously.
Gifting your Spanish assets before you die, free of tax
Unlike in the UK, where the donee of a gift may avoid liability to tax in respect of a gift by the donor surviving for seven years, in Spain the donee bears a tax burden that must be discharged within one month of the gift. As with inheritance tax, each autonomous community can determine the extent to which it reduces the gift tax payable.
Since 11 April 2019, in Andalucía there is a 99% reduction of the gift tax payable in respect of gifts between spouses and from parents to descendants, provided the gift is evidenced in a public document. The result is that whether the assets are transferred during one’s lifetime, or upon one’s death, the tax payable is either nil or negligible. Further to the recent decisions of the Spanish Supreme Court mentioned earlier, the tax benefits can be enjoyed by anyone whether or not resident in the EU or the EEA.
There are similarly generous reductions of gift tax available in relation to assets held in Murcia and in the Canary Islands. Other autonomous communities may follow suit, although many already offer more conservative reductions.
What is clear for UK citizens is that whatever the terms of our departure from the EU, we will not be prejudiced in terms of either the cost of a secured loan, or our liability to Spanish inheritance or gift tax.