Stronachs Logo

Owning property abroad is increasingly popular – whether as an investment, holiday home, or retirement property. Spain is particularly a popular choice for a place in the sun.

Individuals who own or who are considering purchasing property in Spain need to be aware of some potentially unexpected legal implications. Three of the main considerations are discussed below.

Spanish Wills

If an individual is considering owning property in Spain, it is advisable that they put in place a Spanish Will. Although not a legal requirement, it is strongly recommended in order to avoid the additional hurdles that have to be overcome if that person dies without a Spanish Will. The length of time it takes to wind up an individual’s Spanish estate will be increased significantly if there is not an appropriate Will in place. This can cause problems for the beneficiaries, who must pay Spanish Inheritance Tax within six months of the date of death. The costs of winding up the individual’s Spanish estate are also greater. It is not unusual for these additional costs to exceed the original expense of preparing a Spanish Will.

Individuals who already have a Spanish Will in place should also ensure that its terms are kept under review. Many people will be aware that there are strict rules that apply to the succession of Spanish property owned by Spanish nationals. It should be noted, however, that Spain has recently passed legislation extending the application of Spanish law to the succession of Spanish property owned by those who are “habitually resident” in Spain. This means that, potentially, UK nationals who are habitually resident in Spain, but had prepared their Spanish Wills on the basis that Scots law would apply to their estates in Spain, may now be caught by these strict Spanish rules.

Spanish law operates a system of forced heirship requiring individuals to leave a proportion of their estate to certain beneficiaries. If the terms of the Will do not comply with these requirements, any “disappointed beneficiaries” can apply to court to have the Will reduced in order to obtain their share of the estate. Due to this extension of the application of Spanish law, these forced heirship rules can now apply to the Spanish estates of UK nationals who are habitually resident in Spain.

However, the application of these rules can be avoided. In order to do this, the individual’s Spanish Will must state that the succession to their Spanish estate is to be governed by the law of their nationality and not that of their habitual residence. Individuals should therefore check their Spanish Wills to ensure that such a clause has been included. Clients should also remember that while the Spanish rules may not apply to them at present, they may do in the future if their circumstances were to change. This should be borne in mind if, for example, clients intend to retire to Spain at a later date.

Administration Process of Spanish Estates

Clients should also be aware that the procedures involved in the administration of their Spanish estate after their death are vastly different to those that apply to their UK estate. Some of the most important issues are set out below.

In order that they can be used in Spain, key documents such as the death certificate, Will and UK Confirmation (probate) papers will need to be translated into Spanish and “legalised” by the UK Foreign and Commonwealth Office.

In Spain, a document called a Deed of Acceptance of Inheritance is required. The Deed contains an inventory of the assets making up the Spanish estate, along with a note of the value of each asset and details of the beneficiary who is to inherit them. The Deed needs to be signed by the beneficiary inheriting the Spanish estate in front of a Spanish Notary Public. This can prove difficult if the beneficiary is based in the UK. The easiest way to overcome this issue is for a Spanish solicitor to prepare a Spanish Power of Attorney authorising the Spanish solicitor to sign the Deed on the beneficiary’s behalf. The signing of the Deed by the beneficiary (or an Attorney on his or her behalf) is treated as the acceptance of the inheritance of the Spanish estate.

The Spanish and UK Inheritance Tax (“IHT”) systems are also very different. Unlike in the UK where IHT is usually paid from the estate, Spanish IHT is paid by the beneficiary inheriting Spanish estate. This must be paid within six months of death. While the rate of UK IHT on death is fixed at 40% on assets in excess of the available Nil Rate Band, the rate of Spanish IHT and any reductions available vary depending on the region where the Spanish estate is located.

In addition, there is no concept similar to the Nil Rate Band in Spain and beneficiaries are therefore taxed Spanish IHT on the full value of the Spanish estate they are inheriting, subject again to any applicable reductions.

Another factor that may surprise clients is that, unlike in the UK, transfers of Spanish assets between spouses are not exempt from Spanish IHT. Therefore, while an individual who receives their spouse’s entire estate will not suffer IHT in the UK, they will be liable to pay Spanish IHT on the Spanish estate, subject to any applicable reductions.

Spanish Taxes

Unsurprisingly, Inheritance Tax is not the only difference in the taxation regimes of the two countries. Anyone who owns or who is considering owning property in Spain must be aware of the variety of Spanish taxes for which they may be liable. As a further complication, the rates applicable to these taxes often differ depending on the region in Spain where the assets are located.

On purchase of a residential property in Spain, either Spanish VAT (for new build properties) or Transfer Tax (for properties not being sold for the first time) will be due on the purchase price of the property. In addition, an individual who purchases or inherits property in Spain will also be required to pay Spanish Plus Valia Municipal Tax. The amount of tax payable is based on the value of the property, as assessed by the Spanish tax authority, and the number of years that have passed since title to the property last changed hands.

Spanish taxes may also require to be paid by the individual on an ongoing basis even after the purchase of the property has been completed. If an individual is renting out their Spanish property and receives rental income then they will be liable to pay Non-Resident Spanish Income Tax at 19% on any income generated.

It should be noted, however, that even if a client is not renting out their Spanish property, they are deemed to have derived a financial benefit from owning their Spanish property and will be liable to pay Spanish Deemed Income Tax. Again, the rate at which this tax is paid is based on the Spanish tax authorities’ value of the property.

In addition, an individual who owns Spanish assets worth more than €700,000 will have to pay Spanish Wealth Tax annually on the value of their assets in excess of €700,000. The rate of tax ranges from 0.2% to 2.5%.

Spanish taxes will also have to be paid by an individual on any gain generated by the sale or disposal of their Spanish property. The individual is liable to pay Spanish Capital Gains Tax (“SCGT”) on the gain at the current rate of 19%. It is important to note that to ensure this liability is paid by non-resident individuals who sell Spanish property, the buyer of the property is obliged to retain 3% of the purchase price to cover the seller’s SCGT liability on the sale. If the retained 3% exceeds the seller’s SCGT liability then the seller can apply for a refund from the Spanish tax authorities. If, on the other hand, the seller’s SCGT liability exceeds the retained 3%, then additional tax must be paid.

Conclusion

Individuals who own property in Spain, or who are considering purchasing property in Spain need to be aware of the legal implications and taxes involved. It is imperative that proper legal advice is sought in both the UK and in Spain to ensure that all legalities are addressed.

Chambers UK 2018

Contact Info

ABERDEEN OFFICE
28 Albyn Place, Aberdeen AB10 1YL
Tel: +44 1224 845845

 

INVERNESS OFFICE
Camas House, Pavilion 3, Fairways
Business Park, Inverness IV2 6AA
Tel: + 44 1463 713225

The Legal 500 logo