The significant number of foreigner owners of property in Spain and what happens to their property after their death has caused some debate in the past, in particular where law in the testator's home country and Spanish law have conflicting dispositions.

This is of great relevance for property owners as Spanish inheritance rules specify that a part of the inheritance (two thirds of it) will have to be offered to the so-called compulsory inheritors, which are primarily children and spouse and who may not be the preferred choice of the testator.

What the Spanish Law Says

Under Spanish Law, succession to all property , whether movable or immovable and wherever situated, is determined by the law of the deceased's nationality . In addition to this, the personal law of natural persons shall be that determined by their nationality, and will, as well, govern capacity and civil status, family rights and duties and succession by reason of death.

By remitting the matter to foreign law Spanish legislators intentions were to protect as much as possible the cultures and traditions embodied in foreign legislations governing their nationals. There seems to be no room for misinterpretations and confusion, but one cannot say this is straightforward for UK citizens , who precisely are the biggest foreign community in Spain .

English Law versus Spanish Law

By applying the above Spanish disposition English law takes relevance but to the surprise of many, it conversely stipulates that for property located abroad it will be the laws where the property is located which are to be applied .

This legal situation, known as double remission (“reenvio de retorno” in Spanish), has caused many to litigate endlessly in Spanish courts (Denney v. Denney-Royde-Smith Case/ Supreme Court judgment 21 May 1999), as well as in Uk Courts (Adams Case/ Sentence of the High Court of Justice Chancery Division, Vice Chancellor Court, 31 July 1985), thus creating legal uncertainty in many thousands of British property owners when filling out their will questionnaires before their lawyers. By virtue of the above rulings, however, the situation was to be clarified to the effect that the remission of Spanish law was to be only to the UK domestic law and not to their conflict of law rules which would invariably refer back to the Spanish restrictive inheritance rules.

Freedom of testamentary disposition for UK nationals and wills done in Spain

The guiding principle of English law on the subject of succession is the freedom to make a will, which is a declaration of the freedom to determine ones own wishes for after death (certain reservations are applicable in case of a situation of intestate death). This interpretation is now prevalent and is uniformly accepted in Spain , allowing British property owners to avoid the appointment of forcible heirs and eliminating the likelihood of the testament being challenged by forcible heirs under Spanish law.

The most popular form of will in Spain , the so called “open will”, signed before a Notary Public, is the most recommended format to give to the will as it is directly enforceable without the requirement of grant of probate. The contents of the will are printed out in notary paper, observing certain solemnities so far as respects the execution and attestation of it, and will be signed in the presence of any Spanish Notary Public. This will, can be made in a double barrel column format, in English and Spanish.

Finally, when deciding on the disposition of one's asset it will be important to take into account certain parameters in order to minimise the inheritance tax liability. Without prejudice to the proposed elimination of inheritance tax between relatives in some autonomous regions in Spain , consideration will have to be given to the following: age of inheritor, relationship of inheritor with testator, pre-existing wealth of inheritor, fiscal residency status of inheritor, status of habitual domicile of property being bequeathed and number of inheritors. But we shall explain it later.

British property owners are free to determine who their heirs will be and avoid the appointment of forcible heirs, by means of a valid Will. Although foreign wills are valid in Spanish inheritance cases, it is always recommendable to draw up a Spanish will before a Notary public, to ease the inheritance process for our beloved ones upon our death.

Do you need a Spanish will being a foreigner?

A Spanish will is not absolutely necessary although it is highly recommendable. The truth of the matter is that many people avoid drawing up such documents since death is not an issue at a certain period of life. However, any asset proprietor in Spain should arrange his post-death affairs in a neat way, inasmuch as the heirs would otherwise be involved in consuming and expensive legal procedures which would attract different legal jurisdictions. An experience not recommended by those who have experienced it.

Furthermore, so far nobody has died from drawing up a simple will.

Is it enough having a foreign will?

A foreign will may cover your Spanish assets but again the procedure involves obtaining the probate of will in the jurisdiction of the will, legalisation, translation and a lot of legal assistance throughout the procedure that most certainly will amount to a prohibitive legal fees bill.

Where do Spanish wills get registered?

A most widely used type of will is signed before a Notary Public, who keeps the original. A copy is then sent to a central registry of wills which is located in Madrid . This registry issues a certificate upon death of the testator with the contents of the will and is necessary in order to procure the transfer of the assets on to the inheritors.

When does inheritance tax become a problem?

Unbeknownst to most property owners, Inheritance Tax (IHT) is an added potential grievance for many inheritors who have lost their loves ones. Although largely criticized and unpopular due to its negative effect on the capacity and desire to save, it is there and it has to be dealt with .

Where Spanish property , and generally, the estate of a person is transferred by inheritance , the Tax authorities charge as Spanish inheritance tax a percentage on the tax base according to a sliding scale where different considerations are taken into account. The same scale is applicable to donations , which is important insofar as this tax could be applied to a purchase/sale contract where the Tax Authority deems that the parties have under declared the price of the property on a Public deed of conveyance or, in some cases, private purchase contract.

Inheritors are divided into four categories, depending on the relationship with the deceased, and allowances are conceded depending on the group.

Once the appropriate allowance has been deducted, the following tax rate is applied to the remainder:

When the tax has been calculated, a multiplicand is applied to the figure, taking into account pre-existing wealth as well as relationship with the deceased. It has to be noted that Spain does not recognise the concept of partners or common law spouse when applying inheritance tax.

An inheritor who qualifies for the bottom of both scales and falls in group 4 will find the Tax Authority demands from him prior to registering the property under his name a monstrous percentage of 81.6 of the estate left.

Fortunately, very few people qualify in such groups, and if they do, there are legitimate ways to get round the bite. A versed lawyer on inheritance matters will assist you in order to mitigate the exposure to this tax.

Spanish laws differ between regional community, but there is a main legal body which governs the application of tax (Ley de Impuesto de Sucesiones – Inheritance Tax Act) and a number of specific deductions depending on where the inheritors are residents for tax purposes and their age (pursuant to 21/2001 Fiscal and Administrative Measures Act).

Keep in mind that IHT can go up, in specific situations, to 81% of the value of the estate!

What do we propose then?

Depending on several factors, it is of paramount importance to find a legal method to minimise IHT with as little cost as possible thus making it worth the while. We will set forth a number of options. In all cases, there is a presupposition that elders pass away before and we therefore presume that their inheritors will survive them.

•  Buying jointly with future inheritors

This option has the advantage that it does not require any special arrangements to be in place prior to complete, making it a straight purchase and IHT is reduced in the proportion of the ownership share.

Disadvantages : If the inheritors do not have enough financial means to prove their capacity to purchase the property, the Spanish Tax Authority could raise a tax bill in concept of gift, which can be higher than the IHT we are trying to avoid. This situation, albeit unlikely, can be avoided by transferring the funds to the inheritors in the UK to make it subject to UK tax laws and availing therefore from the deductions therein envisaged.

Another disadvantage is of another nature: does everyone wish to have their properties in their children's name, losing control of it? Even though this is not strictly a legal issue the concerns raised can be addressed by operating a variation of this option: splitting ownership into bare ownership and life interest. This sub-option enables the real owners to retain an interest during their life as if the property was fully owned by them. It can be used, rented out and even modified, but not sold. The bare owners can only use it with the permission of the beneficiaries of the life interest, and on death of the formers the inheritance will be calculated depending on a scale.

•  Selling the property to future inheritors

If the property is already owned directly by the person wishing to mitigate IHT, they can sell the property to the potential inheritors, either fully or partly.

Disadvantages: Same as in Option 1.

•  Taking out a mortgage loan on the property

This option is interesting in that it allows a reduction on the value of the property for tax purposes, mitigating the liability accordingly. Such an operation requires that the equity released from the property is placed in some form of tax haven in order to avoid it being taxed.

Disadvantages : It does not fully mitigate IHT liability as most banks will only lend up to 70% of the property valuation, but it can be combined with other options. Also, this option requires that the property owners are not over a certain age (65-70 years is considered the maximum age limit to be eligible for a loan) and is subject to the vagaries of individual life expectancy, as an optimal IHT mitigation requires the loan to be fully owed when death occurs (it would be necessary to top up the loan amount every year and this may not always be possible, especially after a certain age).

•  Buying or Owning through a Spanish Limited Company

This is becoming a very attractive form of minimising the effects of IHT if certain steps are taken. By virtue of article 108 of the LMV (Ley de Mercados de Valores) Act, company shares can be transferred with no transfer tax associated to it provided that none of the acquirers take control of the company (no more than 50% of the shares) and that one year has passed from the act of incorporation of the company or the transfer of the property to the company if this happens after the act of incorporation.

Many property owners are availing of this structure to avoid IHT by affecting the sale of the shares to their inheritors before death. Such a sale is not susceptible of being taxed as a gift. If more anonymity is required, the sale of the shares can take place via a UK Notary Public, and further legalised with the Hague Apostille.

Disadvantages: Company running costs yearly.

•  Buying or Owning through a EU Company

This option is also interesting in that the transfer of the shares after death takes place in the country where the company is domiciled, thus preventing the Spanish authorities from obtaining this information.

IHT may be, however, an issue in the country where the company is domiciled and therefore it will be necessary to clarify the tax position in the country.

Disadvantages: Regard will have to be given to the tax position on the country of residency in order to establish IHT liability there.

•  Signing a Life Insurance

Another option is insurance. This does not reduce IHT, but ensures there is money available to pay the bill. A “whole of life” plan guarantees a payout on death.

Estimating how much insurance you need is tricky, as you do not know when you will die or what you will owe. We recommend indexing a plan, whereby payments and premiums increase over the period, but be careful how the indexing is structured. Some policies start out looking cheap, but 10 years on, you could find the premiums have quadrupled.
The main drawback with insurance, however, is the cost.

Of course the other option is to spend it: if you cannot take it with you, you may as well enjoy it while you are here!