Inheritance Tax On Mallorca Real Estate - How To Reduce It

Inheritance Tax in itself is something that we all want to avoid for our beneficiaries and there are some very weird and wonderful ways to do that, both hypothetically or with actual structures that I have seen. Most of us fall outside these structures simply because the cost of setting these up is prohibitive and for most of us, would cost more than the tax they are set up to try and avoid.

Nevertheless, there are some simple things to bear in mind when buying real estate in Majorca and how you both structure and finance the purchase that will ensure that your beneficiaries pay as little tax as possible.

Spanish Inheritance Tax is applied to the equitable value of the asset that is being inherited and to the proportional amount of that asset that is being inherited. Although there are many values that can be considered, for real estate, the real market value of the property is the one that is used (as opposed to municipal land values for example).

Therefore, if a husband and wife own a property jointly, unless otherwise specified, they each own equal share, therefore 50%, of the property. If either should decease, and name the spouse as the benefactor, then the proportional amount of the property that is being inherited is 50%.
This means that you only pay tax on HALF of the taxable value of the property. So, for a 500.000 euro property, the beneficiary would be liable for inheritance tax on 250.000 euros.

Now, consider the case where there is a mortgage against the property. This means that the equitable value of what is being inherited is the market value less the mortgage. Consider the above example of a 500.000 euro property with a 400.000 euro mortgage, then the equitable value of what is being inherited and therefore liable for tax is reduced to 50.000 euros.

Now lets say, we add the 2.2 children to the purchase structure! OK, just the two kids then, therefore we have 4 owners each with an equal 25% share in the property. In this case, if as before there is a 400.000 euro mortgage and the prime beneficiary is the spouse, then the inheritance tax liability is now reduced to 25.000 euros.
Note: Please note the above figures give the Inheritance Tax Liability NOT the amount of Tax to be paid! For the mortgage to be considered against the property, it must be a Spanish Mortgage listed in the Property Registrar with the Property in question.

So, to minimize the Inheritance Tax to be paid by your beneficiaries, put them on the title deed, mortgage and remortgage the property in Spain (remember if your property price is significantly revalued, so is the inheritance tax liability) to the highest amount possible. Even if you don't need the extra capital, take it and use the capital released by the mortgage for other investments, there is an additional benefit by reducing your annual wealth tax liability.

One final piece of advice. As a non-resident owning property in Spain, it is imperative that all title deed holders have a Spanish Will / Testament. The reason for this is fairly simple, it ensures smooth and inexpensive probate of the Spanish assets that it covers (and it can be written to only covers the Spanish assets). Although foreign wills are accepted and can be executed in Spain, the associated process of translating, notarizing and legalising is a nightmare, to say nothing of the expense.

Sebastiaan Kemna has been in the Real Estate business in Mallorca for over 10 years and runs a very successful Estate Agency in Santa Ponsa.

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