Spain's Ley de Sucesiones, which became law on January 1988, makes inheritance tax lower than before, and many small inheritors will find that they pay no tax at all. The present law provides a total exemption from taxes for inheritances under 2,655,000 pesetas. The 2,655,000 exemption seems rather small, but it applies to each inheritor,  not to the total estate. So, if you have a property worth 20 million pesetas, your half equals an estate valued at 10 million pesetas, your half equals an  estate valued at 10 million pesetas, and you leave it equally divided among your spouse and three children, each will receive an inheritance worth 2.5 million  pesetas, and the bequest will attract no tax at all. In addition, an inheritor under the age of 21 can have an exemption of up to 7,963,000 pesetas. For each year younger than 21, he deducts 664,000 pesetas  more, until he arrives at the maximum 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 1,330,000 pesetas. For more distant relatives, or those not related at all, there is no exemption. The current law also reduces tax rates on bequests to uncles, nephews, cousins and non-relatives. Under the old law, an uncle or cousin receiving an  estate of 10 million pesetas had to pay 48.72 per cent inheritance tax. The rate  is now 18 per cent under the revised law. Under the old law, if one were childless and wished to leave all his property  to his best friend, the rate was extremely high. An estate valued at 10 million  pesetas was taxed at 74.61 per cent. The present law provides for a rate of 22.95 per cent in this case, still quite high. Residents May Get 95% Free Up to 20 Million Pesetas Since 1997, official residents of Spain leaving their Spanish property to  wife or children may be eligible for a 95 per cent reduction in their tax base. This reduction applies up to a maximum of 20 million pesetas. That is, if  your inheritance is a property worth 20 million pesetas, you can reduce this total by 95 per cent, which comes to 19 million pesetas, and you pay tax on only one million pesetas. But if your family home in Spain has a market value of 60 million pesetas, then half of that is 30 million. Your reduction stops at the maximum of 20 million, meaning you must pay Spanish inheritance tax on 10 million pesetas, which comes to just over one million pesetas in tax. 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 she attempts to sell it, she will have to pay any tax due on the original inheritance. This measure forms part of a package of laws designed to help small family businesses rather than retired foreigners. Many small business in Spain have failed on the death of the founder because his inheritors were unable to deal with the inheritance tax on the property, such as a shop or a small factory. Now the children can freely inherit, as long as they continue to operate the  business for 10 years. Retired foreign couples can also benefit, as described above, 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. Rich Pay More Those who are already rich will have to pay more in inheritance tax. The current law provides a sliding scale of tax rates by which a person who already has a large patrimonio, or net worth, must pay more. This rate can go as high as 85 per cent on an estate of more than 100 million pesetas left to a non-relative who already has a net worth of more than 600 million pesetas. How Does Spain Set 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 the valor catastral, or rated value, or at the value set by Hacienda for purposes of wealth tax,  whichever is greater. So, in almost all cases, you will find that the declared  sales price on your title deed, or today's market value, will be the value used.  That is, if you bought your flat 20 years ago for 10 million pesetas, and it is worth 25 million on the market today, Spain's tax agency will value it at 25 million for purposes of calculating inheritance tax. When you make your inheritance tax declaration, if you declare the flat as worth 20 million pesetas, you might get away with it, or you might get a notice from Hacienda that they have valued it at 25 million and you must pay tax on  five million pesetas more. Remember that Hacienda has its own office of valuation and is perfectly aware  of the market price of real estate. They will not fine you, but they will charge you the extra tax. They do this frequently. If you disagree with their valuation, you can request an independent survey, a tasacion. PERSONAL EFFECTS The furniture, clothing, personal possessions and so on of the deceased are  called the ajuar. For inheritance tax purposes they are routinely 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 your 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 aeroplanes, 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 1.5 million pesetas. 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 1.5 million pesetas. BANK ACCOUNTS The balance on the day of death is added to the estate. How to Use the Tax Table: A Sample Calculation You can calculate your own inheritance tax by using the tables shown here. First, figure your total value by referring to the section above on  evaluations. Reductions You can then subtract from this amount any debts owed by the deceased. This  would include a mortgage still unpaid on the property, for example. You can also deduct the expenses of the last illness and the funeral and burial. Refusal of Inheritance In cases where the debts of an estate are greater than the assets, which could happen when a small business constitutes the estate, for example, the  inheritors can refuse to accept the inheritance, thus being free of their  parent's debts. After you have made any deductions allowed you for the inheritance tax, such as your basic exemption of 2,655,000 pesetas if the estate is passing to close family, let's suppose that your final taxable inheritance is about seven million pesetas. Now you look at the table to find the nearest figure below that amount.  In this case it is 6,646,000 pesetas and you have a tax due of 621,834 pesetas. Now you need to consult the marginal percentage list, for the rate charged on  the difference between the steps. In your case you find that you must pay 11.90 per cent of the difference between 6,646,000 and your seven million. The  difference is 354,000 pesetas. Multiply this by 11.90 percent and this gives you another 42,126 pesetas. Add the two together and you have a total tax of 663,960 pesetas, a little less than 10 per cent of your base. These numbers were originally nice round numbers like three million or 10  million, but they have been increased according to inflation since the law was  originally passed. From this table, it looks as if 34 per cent is the absolute top rate of  Spanish inheritance tax. This is true when the estate is passed in direct line  of descent or between spouses. But it can be much higher when bequests are made  to more distant relatives or to non-relatives. And it can be even higher when  the inheritor is already wealthy. Remember that the sliding scale of Spanish  inheritance tax is designed to favour the poor and soak the rich. This scale provides multiplying coefficients for the degree of relationship  and also for the amount of existing wealth of the inheritor. To get the amount of tax due from those who are more distant relatives or non-related and those who already have sizeable fortunes, you must multiply the basic tax rates above  by the coefficients given in the table. So, if you are fortunate enough to possess assets worth more than 669 million  pesetas, and inherit more than 132 million pesetas from someone who is not  related to you, the Spanish tax ministry will multiply the 34 per cent by the  2.4 coefficient and will demand a tax from you of 81.6 per cent. This system penalizes inheritance to non-relations because it is designed to protect the family structure as well as the poor. It has caused problems for  same-sex couples and for couples who may have lived together for many years in a  stable relationship but are not married. The high rate of inheritance tax and low exemptions in Spain cause many to seek ways round paying it, some of which are legal, some not. Can You Avoid Spanish Tax? Family Trust Among the perfectly legal possibilities is the formation of a family corporation or trust, in which the family's wealth passes into the hands of the company, with each family member becoming a director of the company. So when one member of the family dies, it involves only a reorganization of the board of directors and a transfer of some of the company shares, attracting very little tax. Offshore Company For non-Spaniards, the constitution of a Gibraltar-based company or other  offshore operation in order to own real property in Spain has been another way to avoid Spanish inheritance taxes. In this case, when the founder of the company dies he leaves his shares to whomever he chooses in a will made outside of Spain. But as far as Spain is concerned, the same company continues to own the property and no transfer has taken place, hence there is no tax. See chapter on taxes for more information but be warned that Spain has placed a special tax on properties owned by companies registered in offshore tax havens. You will need expert legal advice on your individual circumstances and the possible  disadvantages of this offshore ownership before you decide. Five-Year Limit Another trick takes advantage of the fact that the statute of limitations on inheritance tax runs out after five years. That is, the Estate cannot collect the tax once five years have elapsed. So the scheme is to "lose" the deceased's will for five years, not declaring the property for inheritance. At the end of five years, the inheritor "discovers" the will and takes possession of the  property, free of any inheritance tax. Where the estate is large and the tax is high, this plan can be worth it. Be warned, however, that Spanish law requires that an inheritance be declared  within six months of the death, and if you are found out, you can be subject to a surcharge of 25 per cent on the tax due, or even higher penalties if the Spanish authorities rule that deliberate fraud is involved. Also be warned that the six-month period is included in the statute of limitations, so you really have to wait five years and six months. You can also make a gift of the property to your inheritors while you are  still living, perhaps reserving the right to inhabit the flat as long as you live, but remember that the Spanish gift tax is exactly the same as the inheritance tax. "Sell" Property Now Or you might "sell" your property to your heir, again reserving the usufructo  or lifetime right to inhabit it yourself. At property transfer costs of around  10 per cent, this could save your inheritor a sizeable sum when the valuation is more than 10 million and the inheritor is a non-relative. You have to go on living for at least five years after you carry out this  operation, however, or the State will assume that you did it only to avoid tax  and will charge you the full amount. This particular method has many attractions for samesex couples where one  party owns the property and wishes to leave it to the other, without suffering  the very high rate of taxation applied to non-relatives. Each case needs individual study so it makes sense to consult a Spanish  lawyer when making your will. Summary There are four points to bear in mind in connection with Spanish wills: You need to make a Spanish will disposing of your Spanish property in order  to avoid time-consuming and expensive legal problems for your heirs. Make a separate will disposing of assets located outside of Spain. As a foreigner, you will probably find that Spanish authorities do not oblige you to follow the Spanish law of compulsory heirs, in which you must leave two-thirds of your estate to your children. You can leave your estate to  whomever you choose, but you will be subject to Spanish inheritance tax, which  can be high when property is left to non-relatives. There are very few ways around Spanish inheritance taxes and these legal ways require careful advance planning. Spanish law provides no large exemption  from inheritance tax, such as most countries have when the family home is  transferred. The tax is due after the first two and a half million pesetas. However, if you are an official resident of Spain leaving your property to a spouse or child, you 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. Limit of 20 million pesetas.