From 1 January 2015, new inheritance tax laws took effect in Spain, streamlining inheritance and gift tax liabilities for EU and EEA nationals who are non-residents of Spain, bringing them  into line with a recent European Court of Justice (ECJ) ruling.

On 3 September 2014, the ECJ held that Spain was not acting in the spirit of the European Union by charging different rates of inheritance tax for residents and non-residents.

At the moment, there are 20 sets of rules in Spain in relation with inheritance tax and donation tax, each one stablishing its own tax rates, allowances and releifs: Each one of the 19 regions of Spain has its own set of rules, and then, there is a general set of rules, which only applies to non residents in Spain which are neither citizens of one of the members estates of the EU or the EEA (European Economic Area).

The tax rates and the releifs aproved by the different regions of Spain are in all cases much more favourable than those stablished in the general sets of rules.
In this article, we study the following questions:
1.- Will British homeowners in Spain continue to benefit from the more favourable tax rates and releifs in relation to inheritance tax after the departure of the United Kingdom from the European Union?

2.- Would it be possible or desirable for British property owners in Spain to take any action before the departure of the UK from the EU in order to reduce or minimize the negative impact that such an exit may have on their future inheritance tax?

FIRST: Will British homeowners in Spain continue to benefit from the more favourable tax rates and releifs in relation to inheritance tax after the departure of the United Kingdom from the European Union?

The question can have a big economic transcendence since there are hundreds of thousands of British who own property in Spain, and in most Spanish Regions the deductions applicable in inheritance and gift taxes are very important.

If we look at the Spanish regions where there is a greater presence of non-resident British owners, we can check the following:

In the Canaries and Madrid there is a tax releif of 99.9% in both taxes for mortis causa transmissions and for donations between spouses and between ancestors and descendants.

In Catalonia there is a 99% releif between spouses on inheritance tax. For ancestors and descendants, the releif is 99% for inheritances of less than 100,000 € and 84,5% for inheritances up to 1,000,000 euros.

In the Region of Valencia, no inheritance tax or donation tax is payable between spouses; Between parents and children there is no tax to be paid for  inheritance or donations of less than 100,000 € and there is a 75% bonus for inheritance or donations from that amount onwards.

In Andalucia, there is a tax-free inheritance tax allowance of 250,000 € for direct family members.

On the other side, for non residents who are neither residents of a EU or a EEA member estate, the ISD (Impuesto sobre Sucesiones y Donaciones) on an inheritance could amount, in some cases, to up to 34% of the inheritance, and the tax free inheritance allowance is of only 40.140 € for spouses and for children under 21, and of 23.215 € for older children and for parents.

We next analyze whether the British homeowners in Spain will continue to benefit from the lower tax rates and the reliefs  that have been approved by the different Spanish regions, after the departure of the United Kingdom from the European Union.

The better tax conditions currently applicable to residents of EU and EEA Member States will automatically cease to apply to citizens residing in the United Kingdom whenever the exit of Britain of the EU takes effect.

1.- Firstly, if the UK, when leaving the European Union, automatically enters the European Economic Area, British citizens will be able to continue to benefit from tax deductions as before.

The European Economic Area now comprises only three countries: Norway, Iceland and Lichstenstein. If the United Kingdom were to join the EEA, it would ensure that it would continued to enjoy all the benefits of the Internal Market, as well as not having to participate in the Common Agriculture and Fisheries Policy, the Regional Policy and other policies (taxation, etc.) with whom Britain has never feel comfortable.

However, the members of the EEA must assume and abide by all internal market rules adopted by the European Union (the Commission, the European Council, the European Parliament and even the Court of Justice of Luxembourg), without being able to participate in the decision making or to vote.

If the United Kingdom is so sensitive to the EU’s democratic deficit, how is it going to find itself comfortable in a system, such as that envisaged in the EEA, where it will have no choice but to accept rules that it does not vote for?

There are two other reasons that will make it difficult for the UK to enter the EEA. First, the members of the EEA are obliged to accept the free movement of persons without restrictions; and must also contribute financially to an EEA cohesion fund.

In particular, EEA members accept 75% of Community legislation, including the free movement of persons, but without being able to participate or influence on its aproval and development, and would still be obliged to contribute to the EU budget. For the UK, the remedy to enter the EEA would be worse than remaining an EU Member State

2.- Second, it is possible that in the negotiation of the departure of the United Kingdom of the European Union, a specific regime for the British is agreed that maintains the freedom of movement of capital and that prohibits the discrimination by reason of residence between the Citizens of the European Union and citizens of the UK. The judgment of the Court of Justice of the European Union of 3 September 2012, which obliges Spain to apply tax deductions to citizens residing in EU and EEA member states, is based on non-compliance with articles 63 of the Treaty on the Functioning of the EU and Article 40 of the Agreement on the European Economic Area.

Article 63 TFEU provides:

“1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.

  1. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited”.

The European Court of Justice has ruled in repeated judgments (see, to that effect, Mattner, EU: C: 2010, paragraph 20, and the case-law cited) that the tax on inheritances, as well as the tax treatment of donations, whether they are the object of amounts of money, real estate or movable property, fall within the scope of the provisions of the Treaty relating to free movement of capital.

Consequently, if the EU and the UK would reach an agreement under which the EU provisions on the free movement of capital would continue to be in force for the United Kingdom aswell as the prohibition of all restrictions on movements of Capitals and payments between Member States and the United Kingdom, we understand that the lower tax rates, allowances and releifs that the different Spanish Regions establish in inheritance and gift taxes would continue to be applicable to residents in the UK.

  1. Finally, even if the agreement between the European Union and the United Kingdom mentioned in the previous paragraph were not reached, the Spanish State could legislate in the sense of making the tax deductions enjoyed by residents in member states of the EU also applicable to residents of the United Kingdom. It seems unlikely that Spain will voluntarily agree to apply such exemptions to residents in the United Kingdom; Spain had to be bound by a judgment of the Court of Justice of Luxembourg not to discriminate against residents of the European Union, after being requested by The European Commission, request that the Spanish Government opposed.
  1. In the most likely event that none of the three cases referred to above will be given, the better tax conditions currently applicable to residents of EU and EEA Member States will automatically cease to apply to citizens residing in the United Kingdom whenever the exit of Britain of the EU takes effect.

2.- Would it be possible or desirable for British property owners in Spain to take any action before the departure of the UK from the EU in order to reduce or minimize the negative impact that such an exit may have on their future inheritance tax?

In many cases it could be very interesting before the departure of the United Kingdom from the European Union that residents in that country donate their real estate in Spain to their direct descendants. This could be done while retaining the right of rent and use of the property.
Considering the value of the heritage, the Spanish Region where the property is located and the increase of value that the patrimony in Spain could had experienced since its acquisition, this measure can bring a very important saving in taxes. It has to be considered that donations are subject to capital gains tax. Therefore, each case should be studied individually by an expert in tax law, to analyze the best solution for each person.