Spanish inheritance tax now the same for EU- and non-EU members
As we stated in our post in February 2015, on 01/01/2015, the regulations governing Inheritance Tax were amended, EU citizens began paying the same Inheritance Tax as citizens resident in Spain. From that time EU citizens were able to pay tax in accordance with the regulations of the Autonomous Community where the assets are located. Remember that these regulations are much more beneficial than national regulations on Inheritance Tax, which were applied to EU citizens until that date. This amendment left non-EU citizens out, which were required to continue paying tax according to national regulations.
Supreme Court rules in favour of Non-EU members
However, two judgments of the Supreme Court, in February and March 2018, referring to residents in non-EU countries such as Canada or Switzerland, determined that there would be discrimination contrary to the free movement of capital if non-EU citizens were not allowed to opt for regional regulations in the same manner as EU citizens. Therefore, these non-EU citizens should also be treated in the same manner as EU citizens in terms of Inheritance and Donations Tax, also being eligible to receive regional tax benefits.
We should add that the free movement of capital is enshrined in article 63 of the Treaty on the Functioning of the European Union, which prohibits all restrictions on the movement of capital between Member States and between Member States and third countries, making the limitations for non-EU citizens in terms of Inheritance Tax contrary to the regulations of the European Union.
Since September 2018, the Spanish Tax Agency decided to comply with these rulings and started accepting settlements of Inheritance Tax for non-EU citizens, applying the regulations of the relevant autonomous community to these.
Benefits of tax calculations by Autonomous Communities
This change in tax criteria represents significant savings in terms of inheritance for non-EU citizens, as it should be noted that, in most Autonomous Communities in Spain -including Andalusia-, a widowed spouse, children and descendants, such as grandchildren, barely pay any Inheritance Tax, as they are eligible for significant bonuses. These bonuses in Andalusia were explained in detail in our article from January 2018.
Possibility to reclaim tax until four years back
Suffice it to say that this tax change opens the door to claims from non-EU heirs who have paid Inheritance and Donations Tax over the last few years, if a comparison between national and regional regulations were to show that they paid much more than an EU citizen would have. This claim may be filed provided that the right to claim has not been time-barred, the deadline being established at four years after the payment was made.
Brexit and British citizens
As a last note, considering the consequences of Brexit for British citizens with properties and assets in Spain, fortunately, even if they remain outside the European Union and would be considered non-EU citizens, they would be able to continue to benefit from bonuses and discounts in Inheritance and Donations Tax in the same manner as before.
It should be noted that there are many British homeowners and buyers with properties in Spain and, at least, their heirs will not be harmed in terms of taxes payable in a future inheritance procedure.
“Can I claim back AJD tax from my earlier Extincion de Condominio?”
It’s usual when couples break up and they own a property at 50% -or in properties belonging to several heirs- that for various reasons one of the joint owners would want to sell his or her share and the other one would want keep the entire property. Said sale or purchase can be made effective through executing a Deed of co-ownership termination (Extincion de Condominio).
Over these deeds 1.5% AJD Tax (Actos Juridicos Documentados / Stamp Duty) is paid instead of the normal 8% ITP / Transfer Tax. There now is an important change that even lowers this AJD tax and makes it possible to claim back money from the Spanish Tax Office.
What is the Extincion of Condominio and what are its benefits?
It’s usual when couples break up and they own a property at 50% -or in properties belonging to several heirs- that for various reasons one of the joint owners would want to sell his or her share and the other one would want keep the entire property. Said sale or purchase can be made effective through executing a Deed of co-ownership termination (Extincion de Condominio). Co-ownership termination consists in transferring something that belongs to several owners, who agree to award it/sell it to one of them, with the other joint owner/buyer paying a price for acquiring the share that belonged to the others.Termination entails the end of joint ownership and this asset becomes the property of a single individual but it’s only applicable to properties belonging to several owners, if they decide to sell everything to one of them. It wouldn’t apply if the sale of this share goes to more than one owner, e.g. if there are three joint owners and two of them keep the other one’s share.
Termination of co-ownership offers one main advantage over a sale: the tax paid by the buyer to acquire this share of the property is significantly lower. While in Andalusia the tax on asset transfers for the purchase of a home is 8%, the tax paid for termination of co-ownership is 1.5%, as Stamp Duty (AJD Actos Juridicos Documentados). In other words, to benefit from the tax rate for co-ownership termination, there can only be one owner of the property in the end as, otherwise, this would be considered a normal sale and be taxed at 8% ITP Transfer Tax.
Examples
% ITP tax
3 Couples have a joint property. 1 Couple sells their 33,33% on a 50-50 base to the other 2 couples. Both remaining couples pay 8% over their bought share because the property stays in co-ownership.
2 Couples have a property and 1 couple sells to the other couple that is married in separation of goods. They pay 8% ITP tax because the tax office sees this married couple as 2 parties.
3 Brothers inherit a property and 1 sells his part to 1 brother that then owns 66,66%. The buyer pays 8% ITP because there still is a co-ownership of the property.
1.5% AJD tax
A married couple gets divorced or 2 non-registered partners end their relationship. One sells to the other, so there is no co-ownership anymore and the remaining owner pays 1.5% AJD over the bought 50% of the property.
2 Couples have a property and 1 couple sells to the other couple that ismarried in joint assets. They pay 1,5% AJD tax because the tax office sees them as 1 party.
3 Brothers inherit a property and 2 sell their part to 1 brother that then owns 100%. The buyer pays 1.5% AJD over the bought share of 66,66% because there still is no co-ownership anymore.
The owner/buyer now pays less tax
Since 9 October 2018, thanks to a Judgment of the Spanish Supreme Court, the tax cost assessed for termination of co-ownership has been significantly reduced. Up to that date –incomprehensibly– the tax of 1.5% was paid on the entire value of the property, even if, for instance, the share transferred was just 50% of the property. However, with this judgment, a new approach is established, in which tax will only be paid according to the value of the share effectively being transferred, i.e. only on the price to be paid to the seller, thereby avoiding the extra cost that this type of transfer entailed when tax was paid for 100% of the property value, even if the share acquired was just 30%.
Possibility to claim previous payments AJD tax
Likewise, this change in taxation through the aforementioned judgment can have positive consequences on Deeds of Co-Ownership Termination executed within the last four years. Owners who were already joint owners of a propertyand acquired the rest by paying the price and paying 1.5% tax on the total property value can file a refund claim for undue payments before the corresponding Tax Office. The tax office of the Andalusia Council is the oficina liquidadora.
They can claim a refund of the 1.5% paid for the share of the property they did not acquire, as they already owned that share. If they purchased 30% of the property two years ago and had to pay 1.5% of the total property value, they can claim a refund of the 1.5% paid for the 70% of the property they already owned when they purchased the remaining 30%.
Important: You can only claim back any tax paid within the four years prior to the date of filing the claim for undue payments, as this is the maximum time period to file a claim in accordance with Spanish tax law. I.e. the submission date of the claim cannot be later than four years after the due date of this tax, which is 30 days after the execution of the Deed of Co-Ownership Termination.
New information on the DAFO certificate: in June 2017, we posted an extensive article on the legal situation and the legalisation of homes in non-urban land in Andalusia –DAFO / AFO–, outlining our opinion about positive and negative aspects of this legal precept. Almost a year and a half after this article, we would like to use this post to provide new information to owners and buyers of homes on non-urban land.
This information, which we believe may be useful, does not represent a fundamental change from what has already been stated, as there have been no legislative changes to the DAFO during this year and a half. This information, however, is based on our experience with different Councils in the province of Malaga and the approach they have been using for DAFO, as well as the questions we have seen among our clients.
Are Councils required to issue a DAFO/AFO?
Nowadays, we have found that a growing number of Councils, whenever there is any notification relating to a rural home, automatically open a file and start proceedings to start the DAFO process. This could be for example for the notification of:
Sale of a home
RTA (VTAR / Vivienda Rural) rental registration
Opening License Casa Rural / B&B
Registration of a property in the Land Registry
Applying for an urban certificate (for example for a purchase)
Change of account holder of the water supply
In other words, a growing number of Councils have been taking advantage of any information or request related to a property located on non-urban land to demand owners to start the DAFO process and legalise the rural homes built in the municipality. That said, if you wish to rent your property seasonally and you intend to register your home in the RTA -Andalusian Tourism Registry-, or you would like to register a pool or storage in the Property Registry, we recommend that you first analyse whether your home could obtain a DAFO.
As we have explained on many occasions, the DAFO is a procedure created to regularise homes on non-urban land that have been built illegally –most of them–, over which legal liability can no longer be claimed due to the passage of time. When the Council issues the first notification, it does not really require the owner directly to start the DAFO process. This first notification is about “telling” the owner to submit evidence whether the home complies with the legal requirements to be eligible for DAFO. This means that, if it does not comply with these, it is very likely that this is because there is some illegal situation in the building. This issue may still be subject to penalties from the Council and, in this case, the Council must open a sanctioning procedure against this unlawful situation, with the legal consequences you can imagine.
It is for these reasons that it is very important that, before you do anything or apply for anything at the Council that may entail the opening of a file against the property, you confirm that the home is eligible for DAFO and whether there is any building or work that may give rise to penalty proceedings. In this case, it is best to do nothing until enough time has passed. This in normal countryside is 6 years. Likewise, if you are thinking of buying a rural property, you must know that, when the Public Deed of Sale is executed and submitted to the Property Registry, the Council will receive a notification of this transfer and may later require you to legalise the home through a DAFO process.
Can I carry out internal refurbishments and renewal works through DAFO?
In accordance with Decree 2/2012, which governs DAFO, in this type of buildings “… only repair and preservation works required by the strict maintenance of the safety, habitability and sanitation of the building may be authorised”. Having said this, it is obvious that the works that may be carried out in properties of this type are limited and must be very clearly justified, always thinking about preservation and maintenance and never on improvements or additions, as renewal works as such are not possible. Since all rules are subject to interpretation, it is possible for some Councils to authorise certain types of refurbishment works that others do not. For this reason it is best to inquire at the Council to see if you could get planning permission before the work begins.
However, having said this, the desired internal refurbishments must always be justified from a point of view of habitability and necessity in terms of health and safety in the building, such as:
the opening of windows,
replacement of the roof,
replacement of floors,
substitution of sanitation equipment,
extension of the surface of a room that may be considered too small (without increasing building surface), etc.
The important thing is to evidence the need to carry out such works. Most likely, for the council to issue planning permission, it will be necessary to have completed or applied for the DAFO. Along with the technical project from an architect for the DAFO, the need to carry out such works should be justified due to the safety, habitability or sanitation of the home, applying for the corresponding licence. It will be very difficult to obtain permission without having completed the DAFO process.
If the home you intend to purchase already has a DAFO certificate, it is possible to apply for planning permission for the refurbishment works mentioned above but it is necessary to take into account the date the DAFO was obtained. It would not be very logical to apply for permission to refurbish a home for which the DAFO was approved only a few months prior, as the DAFO is supposed to certify that the home was in perfect conditions of habitability, without problems in terms of its safety or sanitation. Needless to say, if there has actually been some sort of unforeseen breakdown or accident in the property, permission may be requested for such repairs.
Can properties with a DAFO/AFO be mortgaged?
This question arises because a Spanish Royal Decree from 2009, regulating the mortgage market, contains an article that specifies that properties not meeting the legal requirements may not be mortgaged. Despite the existence of this rule, we must state that rural properties or homes on non-urban land have been, are and will continue to be able to obtain mortgages. There may be some banking institutions that do not provide mortgages for rural properties but there are many that do, which is logical as, in most cases, these properties are consolidated and are not subject to penalties, for which reason there is legal certainty over these.
We have submitted a query/test to one of the largest appraisers on the national market for mortgage valuations. In our query, we sent the land registry information – nota simple – of a rustic property with a DAFO certificateregistered in the Property Registry and the response from the appraiser was unequivocal: homes with a DAFO are being appraised on the mortgage market. It should be taken into account that the appraisal value of a property for mortgages issues on non-urban land –a rural property– may be 20% to 40% lower than the purchase price, as the mortgage is given over the valuation price of the property. Nevertheless, a mortgage can be secured for these.
Can I have a RTA / VTAR rental licence for my rural property?
It is possible to rent and register a home on non-urban land in the Andalusian Tourism Registry -RTA- for short-term rentals (less than 2 months). This home would usually be registered as a tourist home for rural accommodation -VTAR-. As clarification, it should be said that it is possible to register rural accommodation or B&B as a country lodge or “casa rural” but this is designed for owners who are engaging in economic activities and operating such rental as a business, with at least one of them being required to register before the Treasury, pay VAT and register for Social Security.
The registration of a rural property in the RTA is subject to two approaches, depending on whether we talk to the Regional Government of Andalusia or the Council.
a. Regional Government of Andalusia
A few days ago, we had a talk with an inspector of the Regional Government in Malaga, who is in charge of inspecting homes of this type. Among other things, he told us that the Licence for First Occupation –Licencia de Primera Ocupación or LPO– is necessary to register homes on non-urban land in the RTA. As some people know, very few rural homes have an LPO. However, it is possible to obtain “legalisation” through the DAFO. The Inspectorate of Malaga have told us that a DAFO certificate would not be deemed to replace the Licence for Initial Occupation. In my legal opinion, I think that the Inspectorate are wrong and I clearly deem it arguable that, in the absence of a Licence for First Occupation, if a property has a DAFO certificate, this document should be accepted. Among other things, the DAFO certificate is the council recognition of the habitability of the property on non-urban land. In fact, Councils interpret this as a licence for the occupation of the property.
b. Councils
The Regional Government of Andalusia will notify the Town Hall when a home is registered in the RTA and this will lead some Councils to automatically call upon the owner to legalise the home through DAFO. It is also possible that a Council form will need to be completed before the home can be rented. Ultimately, at the municipal level, it is necessary to notify that you intend to rent your home and, if you lack an LPO, you will probably have to obtain a DAFO so that you can get this document, which recognises the habitability and occupation of the dwelling.
What should I do if I want to buy a rural home?
You can select the one you like best, without fears or concerns. Take the time you need and, once you have made a choice, you can start the buying process and negotiation. At the start of the process, do not hesitate to hire a lawyer specialising on this matter, who is familiar with this aspect of the law. As we have stated on many occasions, the cost of a lawyer is very small in comparison to all the money you will spend to buy a property in Spain. Saving money by failing to hire a lawyer during the process to buy your home in Spain may be one of the biggest mistakes you ever make. I know you may think what I want to do is to sell you my services –and this is true, this is why I work. But if you think about it carefully, you will understand the importance of having sound legal advice while buying a property in a country different from yours.
Please be aware that C&D Solicitors/Abogados (in Torrox, Malaga / Spain) doesn´t have any relation with a court case against ISS Intelligent Software Solutions/Realistix. Criminals are offering victims of this time-share fraud through telephone calls a very expensive fake service for the application of a Spanish fiscal number (NIE). They state that these costs are necesarry to reclaim the money they have lost. The logo they use in their email communication is from a law firm in Mexico, but they use C&D Solicitor´s name and office address. It is fake, so please don´t respond to them. We have reported this fraud to the Spanish authorities.
For further details please read the following article.
On 1 January 2018, a new reform of Inheritance Tax entered into force in Andalusia, the main change of which was to raise the tax-exempt amount to one million euros. This new reform changes the reform introduced a year ago, which we explained in our post of November 2016.
Which heirs would be exempt from Inheritance Tax?
Heirs that meet each one of the following requirements would be exempt:
For the heir to be included in groups I and II as established in the regulation governing this tax, the heir needs to be the spouse, child, grandchild or parent of the deceased
For the value of the estate to be inherited per heir does not exceed one million euros
For the pre-existing assets of the heir to be less than one million euros
For the heir to be a citizen of a Member State of the European Union or, if they are citizen from outside the European Union, both the deceased and the heir must reside in Andalusia
What happens with other family members who inherit?
All other heirs, such as siblings, nephews, nieces, uncles, aunts and cousins of the deceased are included in groups III and IV of the Inheritance Tax and will continue to pay the same amounts.
In other words, these heirs will pay inheritance tax from the first euro they inherit except for heirs in group III, who are able to deduct an amount of 7,993.46 euros. This means, for example, that if John leaves his nephew his Nerja property valued at 240,000 euros as inheritance, his nephew will have to pay about 63,000 euros in Inheritance Tax.
What happens if you inherit from your best friend?
You would be included in group IV of this regulation. This means that if John, instead of leaving the 240,000-euro property to his nephew leaves it to his best friend, he or she will have to pay about 80,000 euros in Inheritance Tax.
How are property values calculated for Inheritance Tax for non-married longest living?
Every year, the Regional Government of Andalusia publishes a regulation that establishes certain coefficients to update the values of urban properties located in Andalusia. These coefficients are applied to the cadastral value of the property; this you can find in your Property Tax receipts. The result of applying these coefficients to the cadastral value is what we call the minimum taxable value.
The regulation explained above deals with the minimum taxable value of urban property but, in the case of rural property, this isn´t applicable. Therefore it is necessary to obtain a valuation from the technicians of the Regional Government of Andalusia to calculate the minimum taxable value. However, the Regional Government of Andalusia in the province of Malaga uses the coefficients published every year by the College of Architects of Malaga to calculate the value of rural properties.
Regarding the means used by the administration to calculate the minimum taxable value of properties in Andalusia –as well as other Autonomous Communities–, there is much controversy in general and there is the possibility to challenge those values in the event that the person liable to pay the tax deems them excessive or not adjusted to reality. This topic is complex enough to be covered in a whole new article.
NON-MARRIED LONGEST LIVING OR UNREGISTERED COUPLES IN ANDALUSIA
Who are we talking about?
In the event that a couple is not married –either in their country of origin or in Spain–, if one of them dies and leaves the other member of the couple as an heir, for the purposes of Inheritance Tax this person would be considered to be in group IV. In other words, in this case the partner is considered to be just a friend putting the person in the group with the highest rate of Inheritance Tax.
What happens to common-law partners registerd in Andalucia?
In Andalusia, couples registered in the Registry of Common-Law Partners of Andalusia are equivalent to married couples for the purposes of Inheritance Tax, for which reason they would benefit from the deductions for spouses explained above.
What happens to common-law partners registered in another Member State of the European Union?
In this case, the Regional Government of Andalusia does not recognise such registration for the purpose of Inheritance Tax, for which reason those couples would pay tax as though they had received inheritance from a friend, leaving them in the group taxed at the highest rate.
If John leaves his partner Mark 50% of the property they both purchased in Almuñecar in 2005 and if the fiscal value of that 50% is 120,000 euros, Mark, the heir, would have to pay about 30,000 euros in Inheritance Tax for inheriting 50% of that property.
If John and Mark had been married or registered in the registry of common-law partners of Andalusia, Mark would not pay a single euro for inheriting 50% of the property from John.
What should be done in this case?
If you have property in Spain with your partner and you would like him or her to inherit your part and you are unmarried, we advise that you get married (either in Spain or in your country of origin) so that you can benefit from Inheritance Tax reductions. Those who don´t want to get married, can register themselves in the Registry of Common-Law Partners of Andalusia (Registro de Pareja de Hecho) and then the status would be equivalent to that of a married couple.
Property owners who are not citizens of a Member State of the European Union
In this case, heirs may not benefit from reductions for spouses, children, grandchildren and parents of the deceased, so they would pay Inheritance Tax in the event that they inherit. They can only avoid this if both the deceased and the heir are resident in Andalusia.
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