SPANISH INHERITANCE TAXES
The main legislation covering Spanish inheritance taxes is to be found in Law 29/1987 - Ley Impuesto Sobre Sucesiones y Donaciones, and RD 1629/1991 - Reglamento Impuesto sobre Sucesiones y Donaciones. However, Autonomous Communities now have devolved to them the power to raise income for their autonomous community via Spanish inheritance taxes, and, therefore, consideration also needs to taken of autonomous community legislation, as well as state legislation.
Spanish inheritance taxes are levied on what each beneficiary receives. UK inheritance taxes are levied on the estate, as a whole.
Just to make things more complicated, Spanish inheritance taxes are calculated in accordance with a complicated table that progressively taxes at a higher marginal rate the more a beneficiary receives. On the amount calculated in accordance with the complicated table a multiplier is applied depending on how closely, (or how distantly), related the beneficiary is to the deceased, with non-relatives paying double the amount close relatives would have to pay.
There is no spouse exemption in Spain. However, depending on what each Autonomous Community has decided, a greater or smaller amount can be inherited by a spouse, (and other close relatives), free of Spanish inheritance taxes.
The good news is that there is double taxation relief. For a deceased who was resident in the UK for tax purposes and on whose estate is going to be levied UK inheritance tax, the amount of UK tax that is theoretically payable is reduced by such part of the UK inheritance taxes that is referable to the property situated in Spain by up to the full amount of Spanish inheritance taxes that have been paid. This is to be found in sections 158 and 159 of the Inheritance Tax Act 1984.
Regarding a Spanish inheritance the relevant statutory provision is section 159 of the Inheritance Tax Act 1984.
"(1) Where the Board are satisfied that in any territory outside the United Kingdom (an 'overseas territory') any amount of tax imposed by reason of any disposition or other event is attributable to the value of any property, then, if -
(a) that tax is of a character similar to that of inheritance tax or is chargeable on or by reference to death or gifts inter vivos, and
(b) any inheritance tax chargeable by reference to the same disposition or other event is also attributable to the value of that property,
they shall allow a credit in respect of that amount ('the overseas tax') against that inheritance tax in accordance with the following provisions.
(2) Where the property is situated in the overseas territory and not in the United Kingdom, the credit shall be of an amount equal to the overseas tax. ..."
For people resident in the UK liable to UK inheritance tax on their world-wide estate, you first need to work out what that UK inheritance tax is going to be. You cannot then simply reduce the UK bill by the amount paid in Spain. What you need to do is work out how much of the UK inheritance tax is referable to the property in Spain, because that is the absolute maximum by which UK inheritance tax will be reduced due to the payment of Spanish inheritance taxes. The formula to be applied here is the value of the villa in Spain divided by the value of the world-wide estate, multiplied by the UK tax theoretically payable. This gives you the maximum that can be set off by the payment of Spanish inheritance taxes, assuming that so much was actually paid in Spain, because if less was paid in Spain, it'll be the lower sum that can be set off against UK inheritance tax.
As an example, let us assume that the amount of UK inheritance tax payable that can be attributed to the fact that the deceased owned a property in Spain is £20,000.00 and yet the Spanish inheritance taxes payable come to £30,000.00. Only £20,000.00 will come off the UK inheritance tax bill due to the Spanish inheritance taxes that have been paid already in Spain.
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