When a person dies and leaves behind assets, the inheritors, whether by way of the will of a testator or an intestate proceeding, generally must pay a tax on the inheritance. Likewise, individuals who receive gifts are compelled to pay a tax on the gift if it exceeds a certain amount of money.
Each Autonomous Community of Spain has the power to perform tax inspections. In most cases, the governing autonomy will generally be the last residence of the deceased. If, however, the last residence was in a foreign country, then unless exceptions apply, the governing body will be the National Tax Administration.
The following information is useful for individuals who would like to self-report the value of their inherited assets or gifts.
Individuals Accountable for Taxes
The Tax on Inheritance and Gifts Law (Ley del Impuesto sobre Sucesiones y Donaciones or ISD) names three categories of persons who will be responsible for filing a tax return on inheritance or gifts. Corporations are excluded from this list and instead must comply with the Corporate Tax Law.
- Inheritors of assets upon a testator’s death
- Beneficiaries of gifts and other lucrative transfers
- Beneficiaries of life insurance policies
These individuals must file a tax return for their inheritance or gifts when a taxable event occurs. Inheritors who receive assets have six months from the day the testator dies to file, while the beneficiaries have six months from the date of accrual (applicable to both recipients of gifts and life insurance policies).
Taxable Events
Article 3 of the ISD recognises three events that trigger an ISD tax:
- Assets acquired by inheritance, legacy, or any other type of succession.
- Assets acquired as a gift or by any other gratuitous means, inter vivos.
- Amounts accorded to beneficiaries of life insurance policies when the contracting party and the beneficiary are distinct.
Determining Taxable Events
There are many factors to keep in mind in determining whether a taxable event has occurred, such as the following:
- Life insurance premiums paid with community property divide the capital between the spouse, who receives half, and the estate receives the other half. Thus, half is reported on the spouse’s income tax.
- Absolute, unconditional, and gratuitous waiver of one assignee proportionally increases the share of all other assignees. However, if the assignee intends to waive rights to property in the favour of only one other assignee, the waiving party must first liquidate assets, and the assets are then considered a gift.
- A waiver of rights after the statutory period has expired is considered a gift for tax purposes.
- Waiver of joint property that is not unconditional, absolute, and gratuitous, with a public deed before the testator’s death, will result in the liquidation of the waiving party’s assets as a gift to the beneficiaries of the inheritance.
- According to article 20.2c of the ISD Law, tax-free deductions do not apply to surpluses
Presumption of Taxable Events
The ISD law acknowledges two rebuttable presumptions that a taxable event has occurred through a lucrative transfer. First, the presumption of a lucrative transfer exists when a person’s assets have decreased and, simultaneously or shortly thereafter, the assets of a spouse, descendent, heir, or legatee have increased. Second, where a parent or other ancestor has made a costly acquisition against payment on behalf of a minor descendant, a lucrative transfer is presumed unless it can be shown that the minor had sufficient assets or means to make the transaction independently.
Tax Base
The amount that can be taxed varies according to the type of acquisition:
- Transfers on death: the net value of the individual acquisition of each assignee, i.e. the real value of property and rights, subtracting any deductible charges or fees.
- Gifts and other inter vivos transfers: the net value of the individual acquisition of each assignee, i.e. the real value of property and rights, subtracting any deductible charges or fees.
- Life insurance policies: amount collected by the beneficiary.
Declaring Value of Acquisition
Under the ISD Law, the real value of every asset must be declared. As there is no clarification as to what constitutes real value, judicial decisions have often understood this as being market value the price that a person with knowledge would be willing to pay.
Depending on what the assets or rights are, there are important factors to consider.
Market value may be duly certified by the bank where the assets are located. This is possible with the following types of assets:
- Deposits and securities in financial entities: certified value is the balance of the account on the date of the testator’s death.
- Investment fund holdings: certified value is net asset value on the date of the testator’s death.
- Listed shares: value is listed price on the date of the testator’s death.
- Bonds, promissory notes, and other similar debt securities: value on date of accrual.
Determining value through the application of formulas outlined in other taxes. There are many guidelines in the Property Tax, as well as the Property Transfer Tax, for determining the declared value (when used instead of market value). Making these calculations can be difficult:
- Administrative concessions: article 13 of the Property Transfer Tax provides criteria for determining their value.
- Periodic income and pensions: there are no rules specific to these. The tax administration will generally accept calculations made according to Article 16 of the Property Transfer Tax.
- Individual companies and professional associations: valuation is made by their net book value.
- Automotive vehicles and recreational boats: these values can be found in the tables issued annually by the Treasury Department.
Assets and rights at market value:
- Unlisted stocks and shares can be calculated using methods of the Property Tax or Property Transfer Tax.
- Real estate depends on the average market values in each Autonomous Community.
Net Tax Base
Deductions or discounts may apply to the tax base. Again, the amount or extent of a deduction will vary depending on the laws of the governing Autonomous Community, yet there are some categories the Law on ISD taxes recognises and to which deductions will generally apply.
Disability Deduction. Taxpayers with a proven physical, mental, or sensory disability at a minimum of 33 per cent are eligible for a tax deduction. Royal Decree 1971/1999 establishes the procedure for determining the level of disability, and each Autonomous Community determines the actual amount of the deduction.
Deduction for the Usual Residence of the Testator. Generally, for this deduction to apply proof from the registry of a testator’s usual residence must be presented if there is any discrepancy between the testator’s prior tax returns.
Acquisition of an Individual Company or Professional Business. Audits are performed to determine whether the company or business has complied with the requirements established by national laws or autonomous laws, if distinct.
Deduction for Interests in Entities. Several requirements must be met. For instance, the entity in question must carry out an economic activity and not just manage moveable goods or real estate. Audits function mostly to verify that real estate leasing companies do carry out economic activity in compliance with the Personal Income Tax Law. Article 25 of this Law requires the following:
- There must be at least one office exclusively for the management of this activity. The office must be completely separate from other activities that take place on the same premises, and it must be equipped with the necessary materials to carry out the activity, such as furniture, filing cabinets, and computers, as well as enough space for personnel to carry out their activities
- There must be at least one full-time employee dedicated completely to this activity. Two individuals employed part-time is not a substitute for this requirement. The individual may be a family member
- The amount of individual holdings must be over 5 per cent, or 20 per cent in the case of a family group
- Management functions must be carried out effectively by the individual or by another member of the family group, with compensation for personal work and economic activities
- Taxpayers must be able to present documents showing they have a right to these deductions
Legal Advice
- If you receive a costly inter vivos gift, you may have to declare the value of it on your tax return. The laws of the Autonomous Community state the minimum amounts for declaring
- If you have received a gift that exceeds the minimum amount established by the Autonomous Community, you have six months from the date of acquisition of the gift to report it
- If you have inherited assets, you have six months from the date of the testator to declare the value of these assets
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