Worried about inheritance tax?

We would like to specially direct this article to British people in response to numerous enquiries that we have received during the past couple of weeks following an article published in The Gazette life

That Article suggested that the solution to possible future inheritance tax problems is gifting the properties to children now. We would like to offer you our point of view on this.

As the law currently stands, there is no inheritance tax between father and children or between husband and wife for European citizens owning property in the Canary Islands, so right now it is actually cheaper for property owned by EEC members to be transferred by inheritance upon death, rather than by gift.

The reason is because, even though, as the article mentions, the gifting of property between next of kin is exempt from gift tax, the donor would be liable for capital gains tax as if it was a sale (levied at approximately 19% of the profit margin, the profit margin being the difference between the value in the deed when the property was purchased and the value of the property in the deed of gift, which has to be a realistic market value). This important point is not mentioned in the article published recently.
Also, you need to consider that, apart from residents in the Canary Islands (who declare their worldwide assets in Spain) inheritance tax and gift tax relief is only applicable to EEC members.  This means that if finally UK proceeds with Brexit and leaves the EEC, then the non-resident British will become non Europeans and as such, will be liable for inheritance tax and gift tax.
This is the main reason why some people are considering gifting their property now to their children, which is to say, while they still have the benefit of tax exemption (or partial exemption as I explained above in the case of gifting the property) before UK leaves the EEC if they finally do .

Our advice, especially in the case of younger or middle aged parents, is to be cautious and to think twice before going ahead with this.

Gifting your property to your children or to anybody else is a delicate matter. Life is unpredictable meaning that unfortunately parents do not necessarily always outlive their children and nor do family relationships remain the same. Family circumstances or even succession rights can easily change when new family members are introduced into the family circle, such as daughters-in-law or sons-in-law.

The ideal situation without a shadow of doubt is for the property to be in the name of whoever the real owner is, not only for tax reasons, but also because this means that the real owner can at any time use or transfer the property, for example to rent the property or to sell it if he/she needs the money.

Transferring a property to a third party means losing control over the property. Unfortunately it is our wide past experience that leads us to give you this advice. We have encountered situations in which regrettably the child of a client has passed away before his parents and his assets, including the property, have passed on to the son’s wife, for example, with whom they do not have a good relationship, depriving them of the property they paid for and intended to spend their retirement in.

This type of problem can partially be avoided buy only gifting the property itself to children, and retaining the usufruct, or lifetime right of use of the property. This is a legally recognized and registered right that permits the donor to continue making use of the property during his/her lifetime (to let the property or simply to occupy or live in the property) but it does not resolve all the problems, because it still prevents the parent from selling the property should they need the money.

Therefore we strongly advise people, even though each individual case is unique and as such, needs to be individually assessed, to consider all possible consequences before taking such a large step. Life can and will change.

We also take this opportunity to strongly advise against the so called “patrimonial companies” as a magical solution and way to avoid inheritance tax. This is definitely not the case. This is not the main issue of this article so I cannot go in to the negative fiscal implications of this type of company, but believe me when I say this is absolutely not a solution at all. Many of you reading this article may be aware of a British company offering British citizens this type of “patrimonial family shelter” solution which has cost them a lot of money.

I strongly recommend people to always seek the advice of fully qualified and registered local professionals, whether registered lawyers, registered surveyors, registered tax advisors, who have full knowledge of local and Spanish law, which is the applicable law and who would furthermore be in a position to defend your interests before the Spanish authorities and the Spanish Inland Revenue when it becomes necessary.