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Understanding the New Balearic Inheritance Tax Laws

By Armin Gutschick & Anja Sämann-Gutschick

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As reported in the media this summer, the new government in the Balearic Islands has implemented one of its electoral promises by adopting changes to the inheritance tax. The legislative decree of 18 July 2023, states that inheritance by close relatives, i.e. children, spouses and parents, is now subject to a 100% tax reduction. In addition, a reduction of up to 50% of the inheritance tax rate is available for siblings, uncles, aunts, nephews and nieces. The gift tax among close relatives remains at 7%. However, this does not mean that inheritance tax has been completely abolished in Ibiza. The Autonomous Region of the Balearic Islands lacks the authority to do that with all aspects of the inheritance tax. Rather, the aforementioned legislative decree includes additional tax benefits for inheritances and legacies, but these are subject to restrictions.

Firstly, the Decree-Law makes it clear that these new tax benefits are only granted to tax residents in Spain (“obligación personal”). For non-residents, their liability for Spanish inheritance tax (“obligación real”) is limited to their property that is located on Spanish territory. As a rule, this applies primarily to real estate holdings and movable property. Non-residents will have to pay full inheritance tax on these assets, because the tax benefits in the current version of the new regulations only apply to Spanish residents. It would seem that this constitutes discrimination against non-residents in violation of EU law.

On the other hand, the new regulations also contain an interesting problem for tax residents. In order to benefit from the generous tax concessions, the value of a property stated in the deed of acceptance of inheritance may not exceed its actual value. According to the Decree-Law, this is either the reference value of the property (“valor de referencia”) which is determined every year by the cadastre, or the market value if the property does not yet have a reference value. 
A couple signing a contract
So in order for a tax resident to receive the 100% tax relief for properties that have a reference value, the inheritor must declare that value in the tax return. However, this often does not correspond to the market value, i.e. the price that a third party would be willing to pay for the purchase of the property. In those cases where the market value significantly exceeds the reference value, the official acquisition value would be declared and capped at the lower reference value rather than the higher market value.

This low acquisition value is extremely relevant for a later sale of the inherited property. The inheritor should compare the tax consequences and then decide whether he wants to take advantage of the inheritance exemption or not. The capital gain tax to be paid on a future sale of the property is usually much higher (up to 28% of the gain) than the respective inheritance tax rate (which is only 1% up to 700,000 euros). The capital gain tax is based on the difference between the sale price and the inheritor’s acquisition value. The problem arises in cases where the acquisition value, as set by the reference value, is significantly less than the actual market value of the property. In those cases inheritors must ask themselves whether or not it makes more sense to forego the new benefit, and pay tax on the inheritance - including the full market value of the property. The inheritance tax rate table in force in the Balearics since 2016 is as follows: An estate of up to €700,000 has a tax rate of 1%; from €700,000 to €1,000,000 8%; from €1,000,000 to €2,000,000 11%; from  €2,000,000 to €3,000,000 15% and from €3,000,000 and higher 20%.
Calculator, pen, 50 euro notes and financial figures
In summary, the new regulations do not currently apply to non-residents. However, tax residents must think carefully about whether or not they actually want to claim the new inheritance tax relief. When contemplating both estate planning and current income decisions, the possible options need to be carefully weighed taking into account all relevant taxes.  

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