The current inheritance and gift taxes

It was a celebrated success more than two years ago when the Spanish legislator reacted to the ruling of the European Court of Justice of 3.9.2014 and put non-residents on an equal footing with residents in the area of inheritance and gift tax.

As a result of the amending law, the special tax regulations of the respective autonomous regions have also applied in Spain since 1 January 2015 for assets acquired by way of inheritance or gift to EU citizens resident in an EU state.

For this reason, since 2015 a property located in Ibiza is taxed in the case of inheritance or gift according to the tax regulations of the Balearic Islands, even if the testator (deceased) and heirs are resident in another EU state. Until 2016, this had the pleasant consequence that non-resident EU citizens also benefited from the Balearic Islands inheritance tax and only one percent inheritance tax was payable if the inheritance was in ascending or descending line (parents, children). The 1st order heirs of a finca in Ibiza paid only one percent inheritance tax, regardless of the value of the estate.  However, if the heirs are domiciled in Switzerland, the USA or elsewhere outside the EU, the central Spanish tax law with its high tax rates compared to Ibiza continues to apply as the basis for taxation. The inheritance and gift cases of non-residents are dealt with at the competent authority in Madrid, so all the documents (proof of the deed of inheritance and taxes paid) must be sent there for verification, although the tax table of the Balearic Islands applies.

However, the favourable inheritance tax regime of the Balearic Islands has been abolished as of 1st January 2016 and replaced by a new inheritance tax, which will depend on the value of the estate. Up to an amount of €700,000, the tax rate of 1 per cent remains.  From an inheritance of € 700,000 to € 1,000,000, 8%, from € 1,000,000 inheritance 11%, from € 2,000,000 inheritance 15%, from € 3,000,000 inheritance 20% inheritance tax is payable. With an estate value of, for example, € 1 million, the tax burden for the heirs increases to around € 30,000 after deduction of the tax allowance.

The regulations of the Balearic inheritance taxes are also applicable to donations of real estate located in Ibiza. Among direct relatives (children, parents), gifts will be taxed at 7% in the Balearic Islands. For Ibiza, there is the special legal figure of the inheritance contract (“pacto sucesorio”), which is taxed at only 1%. This is a saving of at least 6 percentage points compared to the normal gift tax. A precondition for the applicability of the Ibizan inheritance contract to non-residents is, however, that the figure inheritance contract is also legally regulated in the home country of the parties. This is the case in German civil law, for example, so that the tax advantages of the Ibizan inheritance contract can also be used by German citizens. When making a gift, however, the following disadvantage must be taken into account:  The donor may incur a taxable profit if there is a large difference in value between the original acquisition of the gift (the real estate) and the transfer value at the time of the gift’s execution. If, for example, the property was purchased for €100,000 in 1999 according to the notarial deed of sale and is now given away for €500,000, the non-resident giver must pay 19% profit tax on the €400,000 profit.

What is not dealt with in the amending law of 1 January 2015 is the tax situation before the law came into force. The inheritance tax law of the Balearic Islands, which is favourable for direct heirs, also applies to these cases. The heirs can therefore make a claim for restitution against the tax authorities in Madrid, but a limitation period of four years must be observed. Example case: On 5 December 2013, the non-resident heir paid 650 inheritance taxes to the amount of €7,500 using the tax model. The estate amounted to 70,000 €. This heir can claim back €6,800 (€7,500 minus €700) inheritance tax plus interest from the Spanish tax authorities until 5 December 2017 (up to 4 years after payment of the inheritance tax). When dealing with the claim for repayment, one should consult a tax consultant or lawyer who is competent in the matter.