New exemptions and reductions have come into effect. These reductions, though, apply only to residents. The reductions for residents,  depend on which Regional Community has authority over the property. initially, there was only one Spanish Law of Inheritance and Donations. The rate fixed in this law will be applied to non­residents. The same rate of tax applies to gifts as to inheritances, even among family members. Even worse, a gift does not have the benefit of any exemptions, with very few regional exceptions.

Spain is divided into 17 individual regions, which have control over their health services, part of the income tax, and many other matters. For years most of the regions simply went along using the original inheritance tax system. Last few years some of them have passed their own laws, establishing some little different systems of deductions, exemptions and tax rates.

Eight regions – Madrid, Valencian Community, Basques, Navarra, CastillaLeon, Rioja and Baleares - have in essence removed inheritance tax for residents, not annulling the law, but reducing to insignificant inheritance tax via the scheme of exemptions and deductions.

ONLY RESIDENTS GET TAX BREAKS

If I am not resident in Spain, my property will be subject to the national scheme of inheritance tax, less convenient than the regional rules. If I am a resident, I must be registered as resident in the region where the property is located, in order to be entitled to the exemptions of that region. The same is applied for Spaniards ourselves.

When speaking of total exemptions, this usually refers to the value of the principal residence of the deceased. He must have owned the property for a certain period, from three years to five years, depending on the region. In addition, the heirs must assume not to get rid of the property for five years or ten years, depending on the region.

A real forward planner would take up residence in one of the regions, a few years before he planned to die, consolidating all his assets there. This way, his heirs would have insignificant tax to pay when they succeed to his estate.

It is generally requisite that the heir is close relative and  also resident in order to take benefit of the exemption. A resident of Spain leaving his property to a spouse or child who is also a resident, may be eligible for a 95-per-cent reduction in the value of the property for inheritance tax calculation. This is not available to non-residents. The reduction applies only to the first €120,000 of value.

SPANISH INHERITANCE SYSTEM

Spanish inheritance civil law restrict the testator's freedom to leave his property to anyone he pleases to protect the family and provide for the children.  Spanish law obligate a parent to leave 2/3 of his estate to his children, even bypassing the surviving spouse. In general, most people wish to provide for their children, so they have no problem in making a Spanish will in accordance with those provisions.

A surviving spouse keeps all assets obtained before the matrimony, half of the goods acquired during marriage, and all personal gifts or inheritances which have come directly to this spouse. Considering that most of the possessions were acquired together during their matrimony, half of the property continues to belong to the surviving spouse, so that they do not integrate the deceased assets. If the names of husband and wife both figure on the title deed of the property, each has one half of the ownership. Thus, when one dies, only half of the Spanish property is conveyed. The living spouse continues to own his or her half, with his or her name on the title deed.

COMPULSORY HEIRS

When a person dies leaving children, the estate is divided into three equal parts. 1/3 must be left to the children in equal parts. Another third must also be left to the children, but the testator may decide how to split it, choosing to leave all of this third to only one of his children or grandchildren. If the estate is a house or a piece of land, the child who inherits it cannot dispose of it freely until his surviving parent dies, because the surviving parent holds an usufruct right over the property.

The final third of the estate can be freely willed to anyone the testator chooses.

DYING WITHOUT A WILL

If a foreign resident dies without a will, his Spanish estate will be distributed according to the Spanish law of succession. Let’s assume that a wife and mother dies, leaving a widower and 3 children. The only property is the house. The widower continues to own half the house, the other half of the house constitutes the estate. This is divided equally among the 3 children. When the estate is settled, each child will have 1/3 title to half of the house, meaning that each one now owns 1/6, and the title deed has four names on it, the widower and each of the three children. Besides, the widower holds a usufruct right on the children's share. This means she can use their half of the property until she dies, as well as her own half. They must all agree and sign the deed if the house is to be sold. This causes the frequent situation in Spain where 5 brothers are co owners of a property.

Dying without a will can cause waste of time and expensive legal procedures for my relatives, so if I have any definite ideas about how I want my estate distributed, I should make a Spanish will.

ARE I BOUND BY SPANISH LAW?

Article 9 of the Spanish Civil Code provides that, when a foreign property owner dies, even if he holds an official residence permit, the disposal of any assets he has in Spain will be governed by his own national law, not Spanish law. This article does not free the foreigner from Spanish inheritance taxes.

If my own country's law permits free disposal of the estate, this frees me  from the Spanish rule of compulsory heirs as explained. English law and United States law provide free disposition of assets. German law and Scottish law require that some portion of the estate go to surviving children.

This freedom applies only when such foreigner has an existing foreign will or Spanish will. If he dies intestate, without having made a will, Spanish law will be applied to his assets in Spain and they will be divided equally among his children. This is a powerful argument for making a Spanish will disposing of my assets in Spain according to my wishes.

For citizens of the United Kingdom, the first complication arises here. Great Britain laws state that the disposition of real property such as land, houses and apartments will be governed by the law of the country where such property is located. English law also states that other assets, such as investments, will be governed by the law of the country where the deceased is legally domiciled at the time of his death.

So Spanish law says that English law will apply, and English law says that Spanish law will apply, because that is where the property is located. English citizens  in theory is subject to the Spanish law, which may mean he can freely dispose of only one-third of his assets in Spain. But, even if I am British, I can make a Spanish will leaving my Spanish property to whomever I choose. In practice, any British citizen can make a Spanish will bequeathing his Spanish property to any person of his choice as long as his own national law is ruled by the principle of free disposition of property by testament. When the time comes, the will is executed and the inheritor takes possession of his new property.

The law also says that any foreigner officially resident in Spain is subject to Spanish inheritance law on his world-wide estate. In practice the authorities simply do not ask whether the testator is an official resident or not. They accept as valid the Spanish will disposing of only the Spanish property. The only requirement enforced by Spain is the payment of Spanish inheritance tax on property or assets located in Spain.

So most foreigners will find no problem in making a separate Spanish will to dispose of their immovable property in Spain, even though the law seems to say otherwise, whether they are residents or non-residents.

FOREIGN WILL IS VALID IN SPAIN

Legally, it is not absolutely necessary for I to make a Spanish will to dispose of my assets in Spain. A Briton who owns property in Spain can bequeath his Spanish apartment in the same British will he uses to dispose of his property in England, and his will can be probated in Spain. However, there are a number of steps which must take place in order to do this.

If I have lived in Spain for a long time, it may be necessary for I to re-create a legal domicile in my home country for purposes of making a will. I may be able to do this by filing an official "letter of intent" with my lawyers. This letter states that, even though I hold a Spanish residence permit now, I really intend to return to my home country in the end. This should be sufficient for establishing a legal domicile in my home country and will allow its laws to apply.

Let us suppose that I do this. My foreign will (which can be made at my consulate in Spain as long as the proper formalities are observed) must go through the following process before it can dispose of my Spanish assets:

1. A certified copy of the grant of probate must be legalised by the Spanish consul in the testator's home country, and a Spanish translation of this certified copy prepared. A Spanish lawyer must then be empowered to prepare a list of the assets in Spain, see that the Spanish inheritance taxes are paid, and handle the rest of the paperwork involved in distributing the assets.

2. Two lawyers registered in my home country, or a Notary,or a Spanish consul-general in my home country, must prepare a certificate of law, a Certificado de Ley, which affirms that the testator had the legal capacity to make a will; that the will is valid; that the Spanish law of obligatory heirs and the dispositions relating to property of spouses do not exist in the law of my country; that the will has been duly proved, and that the trustees named have the correct legal powers to administer the estate.

3. Finally, my will is declared effective to dispose of my assets in Spain, and my Spanish lawyer can carry this out.

It's a complicated, time-consuming and expensive process, and it is clearly better to make a Spanish will disposing of my assets in Spain.

MAKING A SPANISH WILL

I go to see a Spanish lawyer and explain my wishes to him. In the case of the death of one spouse, for example, I may wish to leave all possible assets directly to the other spouse, without any inheritance to the children. As a foreigner, I should be able to do this.

Even if surviving children inherit their legal portion, it is not usually necessary for the house to be sold and the proceeds divided, for example. The surviving spouse continues to live in the house and administer it for the good of the children still at home. If the house is later sold, the children can then get their legal share of the price.

The lawyer will advise I as to how the will should read in order to carry out my intentions. People sometimes say that they want their Spanish flat sold and the proceeds divided among the children, for example. My lawyer will tell I that I cannot do this. I must leave the flat to the children in equal parts. They can then sell it and divide the proceeds, but I cannot order its sale in my will. There may be other provisions on which my lawyer can advise.

The will is made out in two columns, one in Spanish and one in English, or in whatever language the testator prefers. The will is then checked by the Notario and signed in his presence. Witnesses are not necessary. This is called a testamento abierto, an open will, which is the usual form. The Notary keeps the original in his files, gives I an authorised copy and sends a notification to the central registry in Madrid, called the Registro Central de Ultima Voluntad.

The certification numbers of all Spanish wills are kept on file here to ensure that a legal copy can always be found. If the will is lost or if I do not know whether the deceased person has made a Spanish will or not, I can apply to the central registry to find out if a Spanish will exists under that name. If it does exist, the registry will give I the number and the name of the Notary who made it in the first place. I can get a copy of the will from the Notary. Having a Spanish will certainly speeds up the legal processes of inheritance.

The Notary will charge around €60 for the will and the lawyer's fee could be about the same, a total of €120, although this could go much higher if the will is complicated or involves large sums of money.

Remember that husband and wife must each make separate wills, as they each own property separately.

I can also find out almost exactly how much inheritance tax my Spanish estate will attract. My lawyer will consult the table of rates and then I will know what to expect.

All too often, the existence of Spanish inheritance tax seems to come as a complete surprise to foreign property owners. This tax is charged even when the inheritance is between spouses, with only a minimum exemption, as explained in the next section.

SECRET WILLS

Should I wish to keep secret the provisions of my will, I can also execute a testamento cerrado, a closed will. It is, of course, important to have a Spanish lawyers  counsel  to make sure my wishes meet the terms with Spanish law. I take this closed will, in an envelope, to the Notario, who seals the envelope and signs it. He then files it, just as with the open will.

Other types of wills are also valid. I can make a holographic will, in my own handwriting, but this later has to be authenticated as genuine before a judge, which means more time, trouble and expense. I can even make a verbal will, in the presence of five witnesses. Each of the five witnesses then has to testify to the Notario that these are truly the wishes of the deceased. The Notario then prepares a written will and certifies it.

INHERITANCE TAX

The Inheritance Tax Law provides short exemption from inheritance tax when property is passed to a spouse or to family members, so many foreign property owners are dismayed to discover that some tax will be due. The present law provides a total exemption from taxes only for legacies under €16,000. The €16,000 exemption seems pretty little, but it applies to each inheritor, not to the total estate. So, if I have a property worth €128,000, my half equals an estate valued at €64,000, and I leave it equally divided among my spouse and three children, each will receive an inheritance worth €16,000, and the bequest will produce no tax.

Besides, a heir under the age of 21 can have an exemption of up to €48,000. For each year younger than 21, he deducts €4,000 more, until he arrives at the maximum exemption at the age of 13. This exemption applies to bequests between parents, children, spouses and brothers and sisters. For uncles, cousins and nephews, the exemption is cut by half to €8,000. For more distant relatives, or those not related at all, there is no exemption.

95% REDUCTION

Official residents of Spain leaving their principal residence to wife or children, who are also official residents, may be eligible for a 99%  reduction in their tax.. There are three conditions to be entitled  to this reduction:

- held an official residence permit for at least three years.

- The house I pass on must be my main residence and I must have lived in it for at least three years.

- The heirs must agree to not to sell the house during 10 years. If they do, they are subject to tax. This reduction applies only up to a maximum of €120,000. if my family home in Spain has a market value of €560.000, then half of that is €280,000. My reduction stops at the maximum of €120.000, meaning I must pay Spanish inheritance tax on €160.000. This reduction is also available for a principal dwelling left to a brother or sister over 65 years of age who has been living with the testator for the previous two years. The reduction does not apply to any other property such as a car or a yacht or shares in companies, only to the home itself.

The inheritor, in turn, must keep the property for at least 10 years. If attempts to sell it, will have to pay any tax due on the original inheritance, plus the legal rates arisen for all the period. The 10 year requirement causes problems for the foreign children who want to sell the property rather than keep it.

Retired foreign couples can also benefit, because the family home is included in the law. When one half of the couple dies, his or her share of the house or flat will be just about tax-free to the surviving partner.

Non-residents cannot take advantage of this reduction.

SETTING TAX VALUES

Spain has a set system for evaluating assets for purposes of inheritance tax. These are:

Real estate

Property is valued either at market price, or at some multiple of the cadastra value. In almost all cases, I will find that the declared sales price on my title deed, or today's market value, will be the value used. That is, if I bought my flat 15 years ago for €90,000, and it is worth €190,000 on the market today, Tax Administration will value it at €190,000 to determine the inheritance tax.

When I make my inheritance tax declaration, if I declare the flat as worth only €160,000, I might get away with it, or I might get a notice from Hacienda that they have valued it at €200,000 and I must pay tax on €40,000 more.

Remember that Hacienda has its own office of valuation and is perfectly aware of the market price of real estate, so they often may charge extra tax for the difference they find out. If I disagree with their valuation, I can request an independent survey, “contradictory assessment”.

In many areas, the regional government sets values as a multiple of the property's rated value, or valor cadastral, which is always lower than the market value.

Personal effects.  The furniture, clothing, personal possessions and so on of the deceased, are customarily valued at 3 per cent of the price of the property. If valuable works of art or antique furniture pieces are included, they may be valued separately. In general, add 3 per cent of the property value to my estate.

Automobiles. Most property owners have automobiles, and these are included separately in the estate. Spain's Tax Agency publishes tables each year for the value of used cars. Other items, such as yachts or airplanes, will be valued separately.

Stocks and shares.Stocks and shares in companies or mutual funds or other investments are valued at their price on the day of the person's death.

Life insurance. If received by children, the total amount is added to the estate, after a reduction of €9,000. If received by surviving spouse, half of the amount is added to the estate, and the other half is taxed as a capital gain in the spouse's yearly income tax. Spouse also has reduction of €9,000.

Bank accounts. The balance on the day of death is added to the estate.