Spanish Inheritance Tax: a practical guide 

Spanish Inheritance Tax (“Impuesto sobre Sucesiones y Donaciones” or ISD) is anything but straightforward. Unlike the UK, where Inheritance Tax is paid by the estate, Spanish Inheritance Tax is payable by the beneficiary. This means that the beneficiary is responsible for filing and paying their own tax.  

Spanish Inheritance is a regional affair. Whilst there is a State or Central Tax legislation, each of the 17 regions (and two autonomous cities in the North of Africa) in which the country is divided have developed their own tax legislation, generally by improving the tax allowances or including tax credits that reduce the tax bill.  

The amount payable can vary significantly depending on where the deceased and the beneficiary reside and the relationship between them, where the assets are located, and the applicable regional tax rules. 

Who pays Spanish Inheritance Tax? 

Unlike in the UK, the estate is not primarily responsible for paying Spanish Inheritance Tax. Instead, each beneficiary is personally liable for the tax arising from the assets they inherit. 

As a result, different beneficiaries of the same estate may pay different amounts of tax depending on their personal circumstances and relationship to the deceased. 

When does Spanish Inheritance Tax apply? 

Spanish Inheritance Tax may be payable where either of the following conditions are met: 

• The inheritance includes assets located in Spain (known as a real obligation); and/or 

• The beneficiary is a tax resident in Spain (known as a personal obligation). 

How much tax is payable? 

The amount of Spanish Inheritance Tax payable depends on a range of factors and must be assessed on a case-by-case basis. 

Spanish Inheritance Tax is governed by national legislation, but Spain’s Autonomous Communities (regions) have extensive powers to modify aspects of the tax, including: 

• tax-free allowances; 

• tax rates and tariffs; and 

• tax credits and reliefs. 

Consequently, the amount of tax payable can vary dramatically from one region to another. 

In many cases, taxpayers can choose between the national regime and the applicable regional regime. Determining which regime applies and which is most beneficial is not straightforward, just like any tax in Spain. 

Another relevant factor is that individuals who are not tax resident in Spain are subject to Spanish Inheritance Tax on Spanish assets only. Those who are Spanish tax resident (who have the “personal obligation”) are taxable on worldwide inherited assets.  

Which region has the right to tax and what rules apply? 

Specific rules determine which region is entitled to administer the tax or if the central government will administer the tax.

The distinction between the authority responsible for administering the tax and the legislation that applies can be complex. Sometimes the central government may be competent to administer the tax but the applicable law to the inheritance could be the rules from one of the regions.

• Where both the deceased and the beneficiary are tax residents in Spain: the competent authority to administer the Spanish Inheritance Tax will generally be the region in which the deceased was tax resident. The allowances and tax credits of the region where the deceased was residing will apply. 

• Where the deceased was a tax resident in Spain and the beneficiary is a non-resident: the tax will generally be administered by the State Tax Authorities. However, the beneficiary may opt to apply the rules of the region in which the deceased was resident instead. It is rare that the State Inheritance Tax is less than the regional tax.

• Where the deceased was a non-resident and the beneficiary is a tax resident in Spain: the tax will generally be administered by the State Tax Authorities. However, the beneficiary may opt to apply the rules of the region where the highest value Spanish assets are located instead. If there are no assets located in Spain, the beneficiary may instead opt for the rules of the region in which they are resident to apply.

• Where both the deceased and the beneficiary are non-residents: the tax will generally be administered by the State Tax Authorities. However, the beneficiary may opt to apply the rules of the region where the assets located in Spain have the highest value.

Valuation of assets 

Back in 2022 a new method of valuation of real estate property was introduced which proved controversial from the outset. This method called valor de referencia or reference value is based on statistics, and it is allocated by the tax authorities. This value is often updated based on transactions in the area. This means that you can have two properties in the same area of similar dimensions but one in a poor state and the other one recently renovated with the same reference value. The reference value is in many cases lower than the market value.

Why is it controversial? It is controversial because, as is also the case in the UK, the value declared in the Spanish Inheritance Tax return will be based on the acquisition value for Capital Gains Tax for future disposals. In some regions, declaring a higher value would have a minimal impact for Spanish Inheritance Tax purposes, therefore it used to be common practice to increase the value for Spanish Inheritance Tax purposes to minimise Capital Gains Tax on the sale.

If a value higher than the reference value is to be declared, it is advisable to carry out an official survey and to include as supporting evidence.  

Bank accounts 

The tax authorities require that an official certificate confirming the balances at date of death that is issued by the bank is filed with the return. Please note that failing to do so may result in the tax authorities not validating the return. Obtaining this certificate may be time consuming and some banks charge for this service.  

Are all beneficiaries treated the same? 

No. Beneficiaries are generally classified into four groups for Spanish Inheritance Tax purposes. 

Group I: Children and other descendants under the age of 21. 

Group II: Children and descendants aged 21 or over, parents and other ascendants, and spouses. 

Group III: Siblings, nephews, nieces, aunts, uncles, and certain in-laws. 

Group IV: More distant relatives, such as cousins, and unrelated individuals. 

The most generous allowances and tax benefits are generally available to Groups I and II, while Groups III and IV receive significantly less favourable treatment. 

What is the tax-free allowance? 

Each beneficiary may be entitled to a tax-free allowance before any Spanish Inheritance Tax becomes payable.

Under the State regime, the allowance available to a child is relatively modest -approximately €16,000. However, some Autonomous Communities have significantly increased these thresholds, with allowances potentially reaching €1 million or more in certain circumstances. 

Given the substantial differences between regions, it is essential to identify both the competent region and the reliefs available under its legislation before calculating any tax liability. 

Are additional reliefs available? 

Yes. Depending on the applicable regional rules, several additional reliefs may be available. 

These can include reliefs relating to: 

• the deceased’s main residence 

• agricultural or rural property 

• historic or listed buildings 

• family businesses 

• agricultural businesses or landholdings. 

In many respects, these reliefs operate similarly to certain UK Inheritance Tax reliefs, such as Business Property Relief and Agricultural Property Relief. 

What tax rate applies? 

Spanish Inheritance Tax does not operate on the basis of a single flat percentage.

Instead, a progressive tariff is applied to the taxable value of the inheritance after deducting all available allowances and reliefs. Additional multipliers may also apply depending on the beneficiary’s relationship to the deceased and their pre-existing wealth.

As a result, calculating the actual liability can be significantly more complex than simply applying a single tax rate.

Tax credits 

Certain regions have introduced highly favourable tax credits that substantially reduce the final tax liability. 

A notable example is the Community of Madrid, where beneficiaries falling within Groups I and II may benefit from a 99% tax credit on the calculated tax liability. In practice, this can reduce the amount payable to a negligible figure.

Deadline for payment 

Spanish Inheritance Tax must generally be paid within six months from the date of death. 

However, it is possible to apply for an extension of a further six months, extending the deadline to the first anniversary of the death. 

The request for an extension must be submitted within five months of the date of death. Applications made after this deadline are normally rejected, regardless of the reason for the delay. 

Unilateral tax relief UK and Spain 

Whilst there is no double tax treaty between Spain and the UK for Inheritance Tax purposes, it is possible to claim unilateral tax relief to avoid paying tax twice on the same asset. The process is not straightforward, and, in some cases, it may not be possible to do so.

Take, for example, when a deceased person is a Long-Term Resident in the UK and their Spanish property passes to their surviving spouse. In this instance there may be no UK Inheritance Tax due, but if the region where the property is in Spain has no full spousal allowance, Inheritance Tax will be paid in Spain. There will be no tax to be credited as there was no tax paid in the UK.

One other example is when there is a taxable estate in the UK and one of the beneficiaries is a Spanish tax resident. In this case the Spanish tax resident has a personal obligation to pay Spanish Inheritance Tax on the assets he has inherited. The beneficiary could claim in Spain unilateral tax relief on the tax already paid in the UK. However, this can be complicated as tax in the UK is paid by the estate. In this instance, an accountant will need to apportion the amount of tax attributable to the share inherited by the beneficiary and submit evidence to the tax authorities in Spain. This can be costly and may not be a commercial solution. 

If you are claiming unilateral tax relief in the UK as a result of paying Spanish Inheritance Tax (long term resident with Spanish assets) it is important that the values declared in the Spanish and UK Inheritance Tax returns are the same as otherwise HMRC will not be able to reconcile the tax paid.

The Birketts view 

Spanish Inheritance Tax is highly fact sensitive. The applicable tax treatment depends not only on the value of the assets, but also on the residence of the deceased and beneficiaries, the location of the assets, the relationship between the parties, and the rules of the relevant autonomous community. 

Another important factor to consider when planning for Inheritance Tax is the political landscape. Spanish Inheritance Tax legislation is subject to frequent changes, particularly at regional level, where autonomous communities may amend tax rules in line with their respective policy agendas. As a result, the tax treatment of inheritances can vary significantly over time and across regions. Given the ongoing political debate surrounding Inheritance Tax in Spain, it is advisable to review your estate planning arrangements regularly and remain informed of any legislative developments that may affect your position.

Obtaining specialist advice at an early stage can help beneficiaries identify available reliefs, comply with filing deadlines, and minimise the overall tax burden.