Spanish Inheritance Tax and avoiding it

So heres the deal.

My aunt and uncle own 4 commercial properties and a residential property valued together at €2,000,000. They are residents here for the last 20 years. Spanish Inheritance tax is very high, so basically if my uncle dies, my aunt will face a huge tax bill. To counter this (and to release equity), there is a scheme over here run by a number of agenies that basically does this.

You can get a 90% LTV mortgage on your house. You get 15% of the value upfront and 75% is invested with a fund manager. Setup charges are high, including €4,000 in legal fees, 1% land registry fee (this seems very high to me), a notary fee of about €300. The fund incurs charges of a 1.4% management fee.

The reason you would take out a mortgage is that it limits your liability to spanish inheritance tax. If there is money owed on the property at death, the tax liability is only on money thats not owed. Tax allowances are very small. Basically by taking out a mortgage, you cover yourself from very large inheritance taxes.

Now this sounds all a bit sketchy to me, my aunt and uncle are older people with no financial nous and called me in. I met the guy that was looking at setting this up and he seemed kosher, but a couple of things rang bells. They are:

1. Does taking a mortgage on your unmortgaged property reduce tax liability for Inheritance tax?
2. If setting this up, Land registry charges of 1% seem very high, certainly compared to Ireland.

If anyone out there has specialisation in this field, it would be great.

Adios

dieter1 said:

They are residents here for the last 20 years.

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Where is here?

dieter1 said:

I met the guy that was looking at setting this up and he seemed kosher,

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Is he a qualified and currently accredited accountant and/or tax advisor? If yes, check qualifications & status very carefully before paying any heed to him. If not, run a mile. If he has a vested interest in, or links to the mortgage industry, go elsewhere for advice.

Your aunt and uncle should really be sourcing and paying for their own advice on this given that they have a property portfolio of €2m and would apparently be exposed to high inheritance taxes if anything was to happen either of them. In fact, they should probably be getting advice from at least 2 independent sources.

What happens to the money paid out for the mortgage ? surely thats also going to be hit by Spanish inheritance tax ?
The estate is the assets minus the liabilities . And this is usually what gets hit by inheritance tax isnt it ? It doesnt matter where you invest the loaned money . The money given as a loan is an asset and would count towards the estate. I cant see how taking out a loan would make the asset invisible with regard to tax.

The worst case scenario here is they are being sold a fund they dont need at a high commission and also being sold an unecessary mortgage at a high commission. The result being they are borrowing to invest in shares?
This is not a wise thing to do for someone who is at retirement age.
There are easier ways to destroy money than paying the charges. They could burn it instead.

Fod Gods sake get the advice of an independent and trusted solicitor and not the advice of someone slick and a good talker with a vested interest.

This is the situation in Spain as a whole ,if you are resident and invest all the proceeds of the sale of your main residence, into a new main residence , then you will pay no CGT bearing in mind that all the expenses you have had as well ,If you are a pensioner and are resident and have lived in your home for three years and six months and sell you can do what you like with the money.

Now , in the Valencian region they have given a gift for this year (not a law ) that if you are a resident and have been for three years regardless of your age there will be no IHT.
Assets located in Spain will be taxed upon inheritance, by the Spanish State and according to Spanish tariffs, whether one is resident in Spain or NOT, and whether the deceased leaves a will or not. A resident of Spain, subject to the question of domicile, could be taxed on worldwide wealth.

The inheritance tax payable is the liability of the inheritor and cannot be taken from the deceased estate. Therefore, where a property is inherited, the property itself cannot be used as collateral security to provide a loan, nor can it be sold until the tax is paid. Furthermore, the tax has to be paid within six months of becoming liable or additional interest and fees become payable.

Another very important factor to be considered is that transfers between spouses are not exempt from inheritance tax in Spain. This can come as a very nasty shock to individuals coming from such places as the United Kingdom where this situation does not arise. Where a property is held in joint names, a substantial inheritance tax liability will arise on the death of one partner, and the property cannot be sold until the tax is paid.

The initial calculation of inheritance tax is based on the net value of the estate. There is a very small nil - rate threshold, and the rate bands range from 7.65% through to a top rate of 34%. For non Spanish residents it is calculated on Spanish sited assets only, but for residents it could be their wealth worldwide.

The inheritance tax liability reduces according to the degree of kinship between the deceased and the people who inherit. However, these allowances are low when compared to the recent increases in property values. Where the estate passes to direct family members such as parents, children and spouses, the allowance is only €15,957. It is half this amount for cousins, nephews and uncles, but it is nil for unrelated persons.

Whilst essentially correct but it does not expalin that there are additional rules that apply in each region.

What they correctly quote is the "national" rates for IHT. Each autonomous region is free to set different rules. I do not think they can change the basic tax rates but they can change the allowances.

In Andalucia you can now get the extra 125000 allowance but only if the value of the estate is less than about 500000.

It is actually a very generous allowance bearing in mind that the way they calculate the value of the property (I am assuming that in most cases the proprty is the major asset) is based on the catastal value (multiplied by a factor of up to 2 depending where you live).

In reality if your property is worth less than 500000€ jointly owned, it is unlikely that you will have to pay any IHT in Andalucia. You also have to pay no IHT if you continue to own the property for 10 years. If you sell after say, 5 years, the IHT you pay will be based on the value at the time you inherited it, not the value when you sell.

Phew!

Mind boggling stuff, and as it is under major review at the moment and lots of changes, you need to be careful and check regularly for updates.
Hope this helps a bit anyway.