LEGAL CORNER.
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QUESTION.
My wife and myself are resident in Marbella. I have the house where we live in plus 11 rental properties. (3 in Sevilla, 2 in Marbella and 6 in Javea ). The total value of these assets is about 2.500.000 euro . Unfortunately all the properties are just in my name. It is my third wife and the properties where already mine when we got married 10 years ago. My wife is 30 years younger than myself and my health is not good . I am now extremely concerned about the amount of inheritance tax she will have to pay when I die. . To make things more complex in virtue of a contract signed in the u.k. with my ex- business partner I still owe him aprox. 400000 euro. My wife has since cosigned this contract.
ANSWER.
How big is the problem ? First let me say that if you do nothing your wife will indeed have a very large tax bill . Her problem would consist in having to pay just under 800000 euro. (yes, you have read correctly eight hundred thousand euro). Why so much: In principle wives in Andalucia are entitled to inherit tax free if the estate is worth less than 175000 euro (one hundred and seventy five thousand euro). The problem is that when the estate like in this case is worth more , you pay on everything but the first sixteen thousand euro The other reason that makes the tax so high, is that in principle I can not reduce the value of the property with the loan as for the tax office to accept that a loan reduces the equity on a property , they require that the loan is documented on title deed in the form of a mortgage with the document tax paid and the deed registered with the property register. We would obviously fight this , but in principle this is how it works.
Possible solutions?
- The best solution would be for you and your wife to move your residence to one of your properties in Calpe. (the autonomous region of Valencia has very high exemption rates for inheritance tax in comparison to Andalucia), If you both reside in Calpe for a minimum of three years before you die, inheritance tax would be payable to the Autonomous region of Valencia instead of Andalucia. This would allow you to obtain a discount of 75% of your tax bill with a maximum discount of 150000 euro. This would bring your bill down to 650000 euro.
- In addition you should document the loan to your ex-partner on a mortgage deed in Spain and have it registered at the property register. In this way the debt at the moment of death will be deductible. The taxable estate would then be 2500000-400000 euro: 2100000 euro . The tax bill in Andalucia would then be 642000 euro and if you lived in Calpe 492000 euro. In other words if you moved to Calpe and documented the loan correctly your wife’s bill would go from 800000 euro to 492000.
- You did not mention on your email if you have children with your wife. This would provide room for more savings, specially in Calpe (autonomous region of Valencia). If you have for example two children and leave the estate divided between your wife and your two children in 3 equal shares we benefit in various ways, but the most important saving is that each heir would be entitled (because they live in the Valencia region) to a reduction of 75% of their tax bill with a maximum of 150000 euro (so we end up getting 450000 euro in exemptions instead of just 150000 euro). If you all lived in Calpe and you left your estate to all three and document the loan correctly they would each pay 42500 euro . Their total tax bill would therefore be 127500 euro.
Conclusion:
- Do nothing: total inheritance tax bill : 800000 euro.
- Stay in Marbella but document your loan correctly:Total inheritance tax 642000 euro.
Move from Marbella to Calpe and document your loan correctly: Inheritance tax bill for your wife : 490000 euro. - Move to Calpe , document your loan correctly and leave your estate to your wife and two children in equal shares: Total inheritance tax bill: 127500 euro.
- Please note that it is impossible to to achieve the above withought professional guidance.
Michael Davies.
Abogado.
