Inheritance tax allowances for non-EU residents

Amongst many other issues, the uncertainties of a definitive agreement with regard to the Brexit negotiations has caused much speculation concerning many affairs in general, and specifically about potential fiscal implications and the loss of current fiscal allowances that at present are applicable to many British nationals who are resident in the UK and who inherit property in Spain.

Until recently, it would have seemed that the current inheritance and gift tax allowances would be lost but what real possible implications could Brexit have for UK resident beneficiaries of property owned in Spain by the deceased?

In 2014, a ruling of the EU Court of Justice obliged Spain to modify its internal legislation on Inheritance and Gift Tax to remove the limitations on the free circulation of capital on the different rates of inheritance and gift tax applicable to Spanish residents and Spanish non-residents.

After a change to the Spanish Inheritance and Gift Tax legislation was made in accordance with the indications of the said ruling.

Asubsequent 2018 judgement issued by the Spanish High Court, which cited a previous EU Court of Justice ruling, deemed that the new Spanish legislation which differentiated between residents of the EU and the EEA on one side and residents of non-EU third countries on the other also constituted a limitation or restriction of the freedom of movement of capitals within the EU and as such, all tax payers should have the same consideration with independence of whether their place of residence was within the EU/EEA or not.

After the said ruling, which seemed to guarantee that even after Brexit UK residents would still be able to benefit from the same inheritance and gift tax allowances as EU residents, there has been even better news as the Spanish General Tax Directorate has issued a binding answer to a consultation submitted in which the Spanish High Court’s decision is recognized and considered to be fully applicable by all parts of the Spanish administration.

The said binding answer, with reference DGT V3151-18 dated 11th December 2018, establishes the following conclusions:

In accordance with the precedents of the Spanish High Court and the EU Court of Justice regarding the freedom of movement of capitals established in article 63 of the Treaty on the Functioning of the EU, the effects of the EU Court of Justice judgement dated September 3, 2014 are applicable to residents from outside of the EU in third countries.

Consequently, the residents of all third countries are no longer to be considered as being outside the scope of the regional Spanish inheritance and gift tax allowances that were introduced by the second additional disposition added to Law 19/1987, dated December 18, on Inheritance and Gift Tax.

The regulations introduced by the said additional disposition will be fully applicable to all non-residents of Spain, with independence of whether they live in another country that is a member of the European Union or the European Economic Area or whether they live in a socalled third country outside of the European Union.

A non-resident tax payer subject to payment of inheritance or gift tax due on assets inherited or received in Spain will have the right to apply the regional allowances approved by the legislation of the autonomous region within which the deceased lived. Or alternately, if the deceased did not live in Spain, and by virtue of article 32 of Law 22/2009, dated December 18, which regulates the system by which the autonomous regions are financed, the tax forms should be submitted to the Non-Residents Tax Department of the Central Tax Office in Madrid, but the tax payer will still be able to apply the corresponding regional fiscal allowances applicable as if he/she were a EU resident.