A friend, who is Spanish, has been resident here in Ireland for about 10 years. Her mother passed away recently and a house she owned in Galicia is being left to her and her brothers who live in Spain. They are not planning on selling it, for now anyway.
Are there any tax implications or anything she would need to declare here in relation to that inheritance?
BR
Inheriting across borders is always confusing because it is messy. Every jurisdiction has its own tax regime in relation to inheritance and these can be very different from one another.
In the case of Spain, things are further complicated by the fact that inheritance tax is one of the areas that has been devolved to the regions. That means it is impossible to give generalised guidance on what the position will be on inheritance tax liability across the country as a whole.
And then you have the Irish rules.
Double taxation agreements exist that are designed to ensure that individuals and companies are not taxed twice on the same income or asset. Ireland is a signatory to 78 of these double taxation agreements, 75 of which were actually in force as of earlier this year.
One of those is with Spain but, unhelpfully in your friend’s case, it does not cover inheritance taxes across both jurisdictions. Apparently, the only double taxation agreements Ireland has which specifically deal with inheritance taxes are those with the United Kingdom and the United States.
However, at a more practical level, there does seem to be some understanding between the two jurisdictions on how such issues should be handled.
The good news for your friend is that, as far as I can see, there are fairly generous provisions for inheriting from close family in both jurisdictions and I do not think she is going to face a tax bill in either country.
But let’s work through that.
I’m going to start with the Irish system as this is the one with which I am most familiar.
Under Irish law, a person is liable for assessment on inheritance tax on anything they receive worldwide if either the person leaving the asset, in this case the house, or the person receiving it is domiciled or ordinarily resident in Ireland
As your friend is Spanish and retains strong family connections there, I am going to assume she is domiciled in Spain, not Ireland. However, you do become ordinarily resident in Ireland after you have been tax resident here for three years, so I would be pretty confident she does come under that category.
That means whatever she receives is measured against the Irish tax rules. You only mention the share of this house, so I am going to assume that is more or less it.
Under the Irish system, as with anyone else living here, she is entitled to receive large gifts or inheritances from her parents totalling €400,000 in value before she has any liability to Irish inheritance tax.
It seems very unlikely that her share of this property will bring her above that limit unless she received generous gifts previously from either parent or a significant inheritance from her father.
In terms of reporting, there is an obligation to notify Revenue when you come within 20 per cent of the relevant category exemption limit. Again, I doubt this applies to your friend.
However, it is worth mentioning for the benefit of other readers who may receive something from a relative or an in-law, for instance, where the thresholds are more modest at €40,000 or €20,000 respectively.
In those cases, once any gift above €3,000 and inheritances cumulatively since December 1991 top €32,000 in relation to close relatives (Category B) or €16,000 from anyone else (Category C), you need to let Revenue know, even though there is no tax to pay until you exceed the relevant tax threshold.
Spanish rules
So much for the Irish rules. What about her position back in Spain?
There are national rules governing how liability to inheritance tax (known locally as Impuesto sobre Sucesiones y Donaciones – ISD) is worked out but, as I said above, this can be superseded by the local rules in each of the 17 Spanish provinces – plus two autonomous cities, Ceuta and Melilla.
And, in this case, that is to your friend’s advantage.
Up to 2014, as someone not resident in Spain, your friend would not have been able to benefit from local autonomous rates on inheritance tax and would have been subject to the much less favourable national rates.
However, the European Union’s top court found that year that Spain could no longer discriminate between residents and non-residents when it came to inheritance. Since Spain amended its laws the following year, all heirs – regardless of where they live – are entitled to benefit from regional rules.
For non-residents, the relevant region is the one where the most valuable Spanish asset they are inheriting is located; so, in your friend’s case, it is Galicia.
Galicia has a generous tax-free allowance for children inheriting from their parents – €1 million. If she were under the age of 21, it could have risen as high as €1.5 million for those under the age of 16.
This compares very favourably with the wider national Spanish exemption for children of just under €16,000 as far as I can see, and also with the Irish €400,000 limit.
Where Ireland has three categories of inheritance tax exemption, Spain has four:
Group 1 covers children, grandchildren and adopted children under the age of 21;
Group 2 covers those same people but over the age of 21 and also covers spouses, parents and grandparents;
Group 3 is the limit for siblings, aunts, uncles, stepchildren and step-parents;
Group 4 covers everyone else – equivalent to our Category C.
Interestingly, despite the very generous Group 1 and 2 allowance in Galicia, Group 3, which corresponds largely to our Category B, offers a tax-free exemption of between €8,000 and €16,000 depending on the closeness of the blood relationship. At the upper end, that is still about double the national figure in Spain, but it is well shy of the €40,000 limit in Ireland.
Similarly, while more distant relatives, such as cousins, along with non-relatives (in-laws, friends, etc) get an allowance of €20,000 in Ireland, they get no allowance either under the Spanish national rules or the ones operating in Galicia.
Galicia also diverges from the national rules when it comes to the rates of tax imposed on anything above their tax-free thresholds.
Nationally, tax is levied on a sliding scale from 7.65 per cent on amounts up to €7,993 over your threshold to 34 per cent on anything above €797,555 in excess of the threshold.
And there can be a multiplier applied to that based on the existing wealth of the beneficiary as well, which would make people in Ireland blanch.
In Galicia, for children, spouses and parents – those in Groups 1 and 2 – the tax rate starts at 5 per cent on the first €50,000 above whatever threshold applies, rising in steps to a maximum of 18 per cent on anything greater than €800,000 above the threshold.
If, however, you are in Groups 3 and 4, the national rates apply.
Again, the beneficiary’s tax bill could be multiplied by anything up to 2.4 depending on their own personal wealth and on their relationship to the person from whom they are inheriting.
To further complicate matters, if you are in Groups 1 and 2 and you receive large gifts during the donor’s lifetime, as against waiting to inherit, the tax rates and bands are different again. They run from 5 per cent on the first €200,000 to 7 per cent on the next €400,000 and 9 per cent on anything above €600,000.
Now all this is academic, at least for your friend, though it may prove useful to others with assets in Spain. As far as your friend is concerned, there is no Spanish tax on any inheritance from her mother below €1 million and no Irish tax on anything less than €400,000.
Given she is sharing the benefit of this property with her brothers, it is hard to see how she is going to breach either of those limits.
Reporting
She does, however, have to file a return with the Spanish tax authorities, even if no tax is due on her inheritance. And hopefully she is not out of time on this.
She will need to download and fill out something called Form 650 – essentially an inheritance tax return – and submit it to the Agencia Estatal de Administración Tributaria, which is the equivalent of our Revenue Commissioners. It is based in Madrid.
The form can be obtained online from the tax office and also completed and submitted online.
The key thing is that the form must be submitted within six months of the death of the person from whom she is benefiting. There is scope to seek a six-month extension but only if sought during the first six-month window.
Failure to meet those deadlines could mean she faces financial penalties and interest even where there is no tax liability, so it is probably best for her to move quickly on this.
Double taxation
I mentioned that there is no double taxation treaty provision between Ireland and Spain covering inheritance tax.
However, Ireland provides relief to Irish residents who have been taxed in Spain – and other countries – who have been taxed in those jurisdictions.
Again, I don’t think this will affect your friend, but it might be of interest to others who are hit with foreign inheritance tax bills.
The details can be found in section 107 of the Capital Acquisitions Tax Consolidation Act 20023 though you will have to work your way through a lot of legislative jargon. In plain English, if you pay inheritance tax in Spain and are liable to tax in Ireland on the same asset or inheritance, the Irish Revenue will allow you a credit against your Irish tax bill for anything you have paid in Spain.
If the Spanish bill is lower than the Irish one, you will pay only the difference between the Spanish bill and the Irish bill to the Irish Revenue. If the Spanish bill is higher than anything you are liable for in Ireland, you pay no tax in Ireland, but nor will you get a refund. This is known as the “lower of two” rule.
The practical outcome is that your total tax liability will be equal to the higher of the two levied – although some may be paid in each country.
For those affected, bear in mind that Revenue is most unlikely to simply take your word for a tax credit. You will need official confirmation of any Spanish tax bill paid from the Spanish authorities.
- Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to [email protected] with a contact phone number. This column is a reader service and is not intended to replace professional advice.