Inheriting a problem ...

[Janet]

Be glad to hear opinions on the issue and views on the article ... seemingly renunciations of inheritances have shot up in Spain recently with people unable to afford to inherit because of inheritance tax ...

[Myrtle Hogan-Lance]

Do I understand correctly:  the inheritor who accepts the inheritance not only accepts property and goods but assumes responsibility for debts?  And that the estate is taxed only on the value of property and goods without the balancing negative value of the debt?

[Perikles]

Do I understand correctly:  the inheritor who accepts the inheritance not only accepts property and goods but assumes responsibility for debts?  And that the estate is taxed only on the value of property and goods without the balancing negative value of the debt?

My guess is that tax is applied to what is left of an estate after all assets have been identifed and all debts subtracted. But what the tax people would identify as a debt is anybody's guess. Presumably the value of a property is the value minus the outstanding mortgage, so that debt would be recognised. Also bank loans, credit cards etc. But if the bloke next door claimed that that he lent the deceased a million euros a week earlier, that might be problematic.

Presumably the increase in numbers of people refusing inheritances reflects the increase in the number of properties in negative equity, where an inheritor can tell the bank to eff off.

[Nova]

But what about the obligatory life insurance that accompanies mortgages?  Surely, even in the case of negative equity, the life insurance cancels the mortgage and the next of kin gets the house (after paying the inheritance taxes)?  Is it these taxes themselves that make accepting the property so costly even when the debt is cleared?

What concerns me is that while the state is the default beneficiary of all the rejected inheritances there is no incentive for them to fix the system.

[Pete]

Is life insurance obligatory on mortgages in Spain? It isn't in England & Wales (or at least wasn't a few years ago, though I'm not aware of it having changed)

I know that when my father passed away a few years ago, we had to settle up his outstanding debts and so on though pretty much all of that was covered out of the insurance.

[Nova]

I should know but I don't 

[Perikles]

But what about the obligatory life insurance that accompanies mortgages? 

For goodness sake, miss. You don't know?  There is an obligatory life insurance to start with but it does not necessarily have to cover the outstanding amount of debt. It might do in some banks, but not others. Not only that, even if they do insist on this, there is no legal right for them to insist that this insurance is continued after the first year. They will deny this of course because all banks are thieving lying bastards, but at that point, you can cancel it or transfer it to another cheaper provider. They will then get cross and say it is written in the escritura, when you can say it is a cláusula abusiva and kindly invite them to fuck off. The only condition they can insist on is the buildings insurance which must be sufficiently high to cover rebuilding if it gets eaten by rodents. Even this insurance can be through another provider, not the bank.

[Nova]

the buildings insurance which must be sufficiently high to cover rebuilding if it gets eaten by rodents.

Speaking of rodents, my mouse is behaving very erratically since I dropped it on the floor this morning - damn!! 

[Janet]

anyway ...

I have the following on my website and had it checked by tax specialists, so it's guaranteed correct info ...

The big problem for most property owners here is inheritance tax (also imposed according to the same calculations on gifts from the living), and it is, it seems to me, the great unmentionable. In the vast majority of British Wills, spouses are the designated heirs, and tax exempt. In Spain, however, this is not the case, and the resulting tax bill can come as a complete shock to a bereaved husband or wife. In Spain, it is blood relationships, not marital, that are given preferential fiscal treatment, and as a rough guide, ISD (Impuesto sobre Sucesiones y Donaciones) on an inheritance could amount, in some cases, to up to 34% of the inherited half, therefore up to 17% or so of the property's value.

Note that the inheritance tax rate is applied specifically to what is inherited, and after any remaining mortgage is deducted. In the case of the death of a husband or wife, the surviving partner inherits 50%. The tax is calculated on this half of the property value, and the rate is banded: for many people it would be around 15-20%, which is the rate applied to an inheritance of between €72,000 and €120,000.  So, let us imagine a couple who have an apartment worth around €200,000.

First of all, the surviving partner inherits half of the property, so €100,000 will attract tax. Before the tax is calculated, however, a threshold is applied. There are various thresholds depending on status and circumstance, and they range from €16,000 for non-residents up to €40,400 for fiscal residents of 5 years standing who are inheriting a share of a main family home (actually it is "the most part" of five years, i.e. 3 years). Let's assume that our couple are non-resident, so they would have a threshold of €16,000. This would be deducted from the €100,000 inherited, leaving €84,000 liable to tax. For that figure, the specific rate is 16.15%, and results in a tax calculation of €13,500. (This example is just intended to give a rough idea. I'm not an accountant, and these figures are rounded off anyway for simplicity. Always see an accountant for firm examples).

In one final step for the calculation, a "multiplier" is applied, and this varies depending on the relationship between the deceased and heir. For bequests between husbands, wives and children, the multiplier is 1 to 1.2 depending on the amount of the inheritance, so the tax as calculated above would end up being between €14,500 to €16,000. For more more distant relationships, the multiplier is 2 to 2.4.

In 2008, the autonomous regional government brought the Canaries into line with other parts of Spain, and granted tax residents a 99.9% reduction in the tax rate for inheritance between close relatives (parents, children, spouses and family partners). This scheme was abolished in April 2012, however, as a result of the economic crisis - see HERE. The reduction had required the testator to have been fiscally resident in the Canary Islands for at least five years, and the heir for one year, for annual tax returns to have been submitted, and resident tax status proven by a fiscal residence certificate from the Hacienda. Moreover, after inheritance, the heir was required to remain fiscally resident in the Canaries and not sell the property for a further 5 years. Now, however, these criteria are defunct because no reduction is available any longer – though the top threshold described above was introduced at the same time to mitigate the blow somewhat.

A further potential problem arises for estates valued in the UK at more than £325,000 because there is currently no dual taxation treaty on inheritance tax between Spain and the UK. Thus for UK domiciled individuals, which is what the vast majority of us are even if fiscally resident in the Canaries, British IHT might be payable in addition to ISD, though inheritance tax paid in Spain can be offset against the British liability, despite the lack of a dual taxation treaty.

There is a range of solutions available for the payment or legal avoidance of ISD/IHT, whether a straight life insurance policy to provide a lump sum to pay the tax, or trust funds, or gifting the property into an English company (though see THIS from belegal.com, which says "using a UK company incorporated purposely is not a real, valid or legitimate vehicle to circumvent the obligation to pay Inheritance Tax in Spain"). The most important thing is to seek advice from a range of suitably experienced professional tax advisers both in the UK and Spain. Your own gestor in Spain and accountant in the UK will also have valuable ideas to contribute. Remember, though, that everyone will almost certainly have an angle, or an interest in getting your business. Make sure that the advice you get comes from as independent a source as possible, and that your final decision is in the best interests of yourselves and your heirs.

One general piece of advice that seems particularly useful is to draw up a Will with multiple benficiaries, e.g. bequeathing 50% of an estate to a spouse and the other 50% to children. This would mean that each heir inherits a share rather than everything being left to a spouse, the benefit being that since in Spain the beneficiary is taxed rather than the estate, each heir would inherit a smaller amount, and thus attract a lower tax band. There would also be more tax-free allowances available. Even more beneficially, it would also mean that the residual estate on second death would be less because some would already have gone to the children (or whichever heirs are chosen) on first bequest.

[Perikles]

Speaking of rodents, my mouse is behaving very erratically since I dropped it on the floor this morning - damn!! 

Have you grasped the message in my post? YOU CAN CANCEL AFTER A YEAR