New inheritance and gift tax rules in Andalucia

From 2018 the inheritance tax rules in Andalucía will undergo radical changes as the new regulation on inheritance and gift tax comes into force. The new rules will, effectively, exempt many estates from Spanish inheritance tax as well as meaning that, in certain circumstances, gifts from parents to children are not taxable.

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New Inheritance Tax Rules in Andalucía

Inheritance tax in Spain operates differently to inheritance tax in the UK. Whereas in the UK the entire estate benefits from a nil rate band, in Spain the nil rate band applies to each beneficiary of the estate. The closer the relationship between the beneficiary and the deceased, the higher the nil rate band.

For a glossary of Spanish inheritance terms, please see our glossary of Spanish inheritance terms here.

The new inheritance regulation in Andalucía will mean that those beneficiaries included in Groups I and II, that is, spouses, children, grandchildren and parents of the deceased, will benefit from a nil rate band of €1,000,000. At present the nil rate band for Group I and Group II beneficiaries is much lower at €250,000.

The new regulation will mean that the vast majority of estates in Andalucía, including those of British citizens with assets in Spain, will be exempt from inheritance tax in Spain.

Those who have previously inherited from their parents an estate with a value of over €1,000,000 will not be able to take advantage of the new rules. At present, those who have inherited an estate of over €402,678.11 are not able to access the nil rate band.

Unfortunately, Group III and IV beneficiaries, that is, siblings, nieces and nephews, uncles and cousins will not benefit from the increased nil rate band in Andalucía.

The regulation will not be retroactive and will not affect estates which are already in the process of being administered, or those which are in a position to be finalised prior to the date that the regulation comes into force in 2018.

Example:

John owns a villa in Marbella. The property is registered in his sole name. He has made a Spanish will in which he leaves his property in Spain to his wife, Jane. Jane has never received an inheritance in Spain. The property is valued at €750,000. Under the system prior to 1 January 2018, if John passes away then Jane would be liable to pay tax upon what she inherits over the value of the nil rate band. In this case that means that Jane could be liable for inheritance tax in Spain on a taxable value of slightly more than €500,000 meaning that the tax to be paid is €119,937. Under the new inheritance tax rules in Andalucía, Jane will pay no inheritance tax.

For more information on Spanish inheritance tax, please see here.

New Gift Tax Rules in Andalucía

In terms of gift tax, the new regulations in Andalucía will be slightly more complex. The new regulation states that in order to benefit from a nil rate band of €1,000,000, the gift must meet the following conditions:

The parent/s should be gifting to a child using a Spanish registered company as a vehicle, or making the gift with the express intention of creating or expanding an existing company.
The gift must be donated using a gift deed signed in the presence of a Notary in Spain.
The funds must remain an asset of the company for at least five years following the gift.

It is important to note that the new inheritance and gift tax regulation affects only Andalucía, not the whole of Spain. The rules within Spain’s autonomous communities are subject to change at any time, but at the moment only Andalucía has chosen to apply such a generous nil rate band.

It is also important to note that the regulation applies to residents of Spain as well as EU nationals. Clearly this means that when the UK leaves the EU there is a possibility that UK citizens will be subject to a different tax regime.

Find out more about non resident tax in Spain.

For more information about the possible effects of Brexit, please see here.