Tax implications of Inheritance and Donations for Non-Residents in Spain

The Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones, ISD) is a tax levied on the acquisition of assets and rights through inheritance, legacy, or donation in Spain. This tax is particularly relevant for non-residents who inherit or receive donations of property located in Spain, as it can have significant financial implications.

Spain has become an attractive destination for many foreigners who acquire properties, either as a second residence or as an investment. According to data from the Spanish Land Registry, foreign buyers accounted for approximately 12.6% of all property purchases in Spain in 2024. This has led to an increase in the transfer of real estate through inheritance or donation to non-residents, making it particularly relevant to understand the applicable tax treatment.

Key Characteristics of the Tax

The Spanish Inheritance and Gift Tax has several distinctive characteristics:

• Progressive tax: The tax rate increases as the taxable base increases, ranging from 7.65% to 34% under state regulations.
• Personal tax: It takes into account the personal circumstances of the taxpayer, such as their kinship with the deceased or donor and their pre-existing wealth.
• Transferred tax: The regulatory powers have been partially transferred to the Autonomous Communities, which can establish their own reductions, bonuses, deductions, and tax rates.
• Direct tax: It taxes the increase in wealth of the heir, legatee, or donee.

Taxable Events

The ISD is levied on the following taxable events:

• Acquisitions mortis causa: Acquisitions of assets and rights through inheritance or legacy, as well as life insurance benefits when the beneficiary is different from the policyholder.
• Acquisitions inter vivos: Acquisitions of assets and rights through donation or any other gratuitous and inter vivos legal transaction.

Legal Framework and Regulatory Evolution

The Inheritance and Gift Tax in Spain is regulated by Law 29/1987, of December 18, and its Regulations (Royal Decree 1629/1991). However, this tax is partially transferred to the Autonomous Communities, which can establish their own reductions, bonuses, deductions, and tax rates.

Key Court Decisions

Several court decisions have been crucial in shaping the current legal framework:

CJEU Ruling of September 3, 2014 (Case C-127/12): This ruling declared that Spain was in breach of European regulations by discriminating against non-residents in the EU. The Court considered that this discrimination violated the principle of free movement of capital established in Article 63 of the Treaty on the Functioning of the European Union (TFEU). The Court argued that the situation of a resident and a non-resident heir could be comparable when both inherited property located in Spain, and therefore, the different tax treatment was not justified.

Spanish Supreme Court Ruling of February 19, 2018: This ruling extended the right to apply regional regulations to residents in third countries (non-EU/EEA). The Supreme Court based its decision on the fact that the free movement of capital, unlike other fundamental freedoms, also applies in relation to third countries. The Court argued that the discrimination against residents in third countries violated Article 63 of the TFEU and that the Spanish tax administration could not maintain this discrimination after the CJEU ruling.

Constitutional Court Ruling of February 18, 2016: This ruling addressed the constitutionality of the different tax treatment between Autonomous Communities. The Court considered that the territorial differences in taxation were constitutional, as they were the result of the legitimate exercise of the fiscal autonomy of the Autonomous Communities within the framework established by the Constitution and the laws.

Tax Implications for Non-Residents

Non-residents who receive assets located in Spain through inheritance or donation are subject to Spanish ISD. The tax implications depend on several factors, including the type of assets, their location, and the relationship between the parties involved.

Territorial Scope of the Tax

For non-residents, the ISD is only applicable to assets and rights located in Spanish territory. This includes:

• Real estate located in Spain
• Rights over real estate located in Spain
• Shares in Spanish companies
• Bank accounts in Spanish financial institutions
• Other assets and rights that can be exercised or must be fulfilled in Spanish territory

Connection Point for Applicable Regulations

To determine which regional regulations to apply, the following connection points are established:

For Inheritances (Successions)

• Primary rule: Autonomous Community of habitual residence of the deceased. The deceased is considered to have their habitual residence in the territory where they have remained for the highest number of days during the five years prior to death.
• If the deceased was not a resident in Spain: The regulations of the Autonomous Community where the highest value of the assets and rights of the estate located in Spain is found will be applied.
• Example: If a British citizen who was not a resident in Spain owned properties in Madrid (valued at €300,000) and Valencia (valued at €200,000), the regulations of the Community of Madrid would apply to the entire inheritance.

For Donations (Gifts)

• For real estate: Autonomous Community where the real estate is located. If the real estate is located in different Autonomous Communities, each property will be taxed according to the regulations of the Community where it is located.
• For other assets and rights: Autonomous Community where the donee has their habitual residence. If the donee is not a resident in Spain, the regulations of the Autonomous Community where the donee had their last residence in Spain will be applied. If they have never been a resident in Spain, the regulations of the Autonomous Community where the donated assets or rights are located will be applied.
• Example: If a French resident donates an apartment in Barcelona to his son (also resident in France), the regulations of Catalonia will apply.

Important Note: If there is no connection point with any Autonomous Community, state regulations will be applied. This can happen, for example, with donations of movable property to non-residents who have never been residents in Spain and where the assets are not clearly located in a specific Autonomous Community.

Taxation of Real Estate for Non-Residents

Real estate is one of the most common assets inherited or received as a donation by non-residents in Spain. The taxation of these properties has specific characteristics that are important to understand.

Valuation of Real Estate

Since 2022, with the entry into force of Law 11/2021, the Administration uses the cadastral reference value as a reference for the valuation of real estate. This value is determined based on the prices communicated by public notaries in real estate transactions.

The cadastral reference value can be consulted on the electronic headquarters of the Cadastre (Sede Electrónica del Catastro). This value is calculated based on the information available in the Cadastre and is updated annually.

It is important to note that the taxpayer can challenge this value if they consider it does not correspond to the real value of the property. In this case, they must provide evidence supporting a different valuation, such as an expert appraisal.

Deductible Items

When calculating the tax base for real estate, certain items may be deductible, depending on whether it is an inheritance or a donation

Deductible Items in Donations

• Charges and encumbrances: Only charges that diminish the real value of the property are deductible. Charges that constitute a personal obligation of the acquirer are not deductible.
• Debts: Debts contracted by the donor are not deductible. This means that if a property is donated with a mortgage, the donee will be taxed on the full value of the property, without deducting the outstanding mortgage.
• Additional taxation: In donations, the donor may also be subject to Personal Income Tax (IRPF) for the capital gain generated (difference between the acquisition value and the transfer value). Additionally, the donee must pay the Municipal Capital Gains Tax (IIVTNU) for the increase in the value of the land.

Deductible Items in Inheritances

• Charges and encumbrances: Charges that diminish the real value of the property, such as easements, usufructs, or other real rights.
• Debts: Debts secured by the property (e.g., mortgages) are deductible if they are duly documented. The deduction is limited to the proportion of the debt that corresponds to the heir, according to their participation in the inheritance.
• Expenses: Expenses related to the last illness, burial, and funeral of the deceased are deductible if they are duly documented and have not been covered by insurance.

Additional Taxes on Real Estate Transfers

In addition to the Inheritance and Gift Tax, the transfer of real estate may be subject to other taxes:

• Municipal Capital Gains Tax (IIVTNU): This tax is levied on the increase in the value of urban land revealed on the occasion of its transfer. It is paid by the heir or donee and is calculated based on the cadastral value of the land and the number of years since the previous transfer.
• Personal Income Tax (IRPF): In the case of donations, the donor may be subject to IRPF for the capital gain generated. This capital gain is calculated as the difference between the acquisition value and the transfer value of the property.
• Non-Resident Income Tax (IRNR): Non-resident donors may be subject to IRNR instead of IRPF for the capital gain generated.

Tax Rates and Regulations by Autonomous Communities

The tax rates and regulations vary significantly between the different Autonomous Communities. This section focuses on the four communities specifically requested: Valencia, Balearic Islands, Andalusia and Canary Islands

General Tax Calculation Method

The ISD is calculated by applying a progressive scale to the tax base, which is then multiplied by a coefficient based on the degree of kinship and the pre-existing wealth of the heir or donee.

The kinship groups are defined as follows:

• Group I: Descendants and adoptees under 21 years of age.
• Group II: Descendants and adoptees 21 years of age or older, spouses, and ascendants.
• Group III: Collateral relatives of the second and third degree (siblings, nephews, nieces, uncles, aunts), and ascendants and descendants by affinity.
• Group IV: Collateral relatives of the fourth degree (cousins), more distant degrees, and strangers.

Inheritance and Gift Tax Differences in Key Spanish Regions

In Spain, Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones – ISD) is regulated at both national and regional levels, leading to significant differences depending on where the assets or heirs are located. Below is a brief comparison of the main fiscal differences across four key regions:

Valencia: Offers generous reductions and bonuses for close relatives. Spouses, children, and parents (Group I and II) benefit from a 75% tax reduction. There are also substantial reductions in the taxable base, such as €100,000 for children under 21 and €156,000 for disabled heirs.

Balearic Islands: Applies progressive tax rates, but close relatives can enjoy bonuses of up to 100% for inheritances, depending on the value. Gift tax is also reduced for direct family members, but inheritances are significantly more favorable than gifts.

Andalusia: Known for its very favorable regime. Spouses, children, and parents receive a 99% tax rebate, both for inheritances and gifts. Additionally, there are high exemptions on the base, making many inheritances and donations effectively tax-free for close relatives.

Canary Islands: Offers a 99.9% rebate for spouses, children, and parents in both inheritances and donations. However, there are limits based on the value of the estate or gift, and distant relatives receive far fewer benefits.

Common Benefits Across Regions

Most regions offer significant reductions (typically 95-99%) for:

• The family home (habitual residence)
• Family businesses
• Agricultural holdings
• Additional reductions for people with disabilities

Important Considerations

• The legislation changes frequently, so it's essential to verify the current regulations at the time of inheritance or donation..
• The relationship between the donor/deceased and the recipient is crucial in determining the applicable benefits.
• While these benefits apply to non-residents as well as residents, non-residents may face additional procedural requirements.

This regional variation creates opportunities for tax planning, but also makes the system more complex to navigate. The differences between regions can result in significantly different tax burdens depending on where the inherited or donated property is located.

General Requirements for Tax Benefits

For non-residents to be able to apply these tax benefits, certain requirements must generally be met:

• Kinship Requirements: Most bonuses are limited to close relatives (Groups I and II).
• Maintenance of the Acquisition: In the case of family businesses or properties with reduction, a maintenance period is usually required (generally 5 years).
• Pre-existence of the Asset: In some cases, it is required that the asset has belonged to the deceased or donor for a minimum period (usually 2 years).
• Formalization in Public Document: In the case of donations, it is usually required that they are formalized in a public deed.

Differences Between Residents and Non-Residents

Although legislation has evolved to eliminate discrimination, there are still some practical differences between residents and non-residents when it comes to inheritance and gift taxation in Spain:

Declaration and Payment Procedure

Non-residents must follow a specific procedure for the declaration and payment of the ISD, which differs in some aspects from the procedure for residents:

1. Filing of the Declaration

The declaration is filed using forms 650 (inheritances) or 651 (donations) before the AEAT Delegation corresponding to the place where the real estate is located. These forms can be obtained from the AEAT website or at the AEAT offices. They must be completed with the identification data of the taxpayer, the deceased or donor, and the assets and rights acquired.

2. Deadline

• Inheritances: 6 months from death, extendable for another 6 months upon prior request. The extension must be requested before the end of the initial 6-month period and is granted automatically.
• Donations: 30 business days from the donation. This period is significantly shorter than for inheritances, which highlights the importance of proper planning.

3. Required Documentation

• Death certificate (in inheritances).
• Certificate from the Registry of Acts of Last Will.
• Will or declaration of heirs.
• Public deed (in donations).
• Inventory of assets with valuation.
• Tax residence certificate of the heir/donee.
• Title of acquisition of the real estate by the deceased or donor.
• IBI receipt (Property Tax).
• Proof of deductible charges, debts, and expenses.

4. Appointment of Tax Representative

Mandatory for non-residents outside the EU/EEA. The appointment must be communicated to the tax administration through the corresponding form.

5. Self-assessment and Payment

Calculation of the tax by applying the corresponding regulations and payment at a collaborating entity. The payment can be made in cash via a Spanish bank branch or via bank transfer.

Navigating the Inheritance and Gift Tax (ISD) in Spain can be complex, particularly for non-residents, due to the interplay between national and regional regulations, evolving legal frameworks, and specific procedural requirements. However, recent legal reforms have leveled the playing field, allowing non-residents to benefit from the same regional tax advantages as residents. Proper planning, accurate valuation, and understanding the applicable rules in each Autonomous Community are essential to minimizing the tax burden and ensuring full compliance. When in doubt, seeking expert guidance is highly recommended to avoid costly mistakes and take full advantage of available tax benefits.