Inheritance tax in Spain: what happens to your Spanish position upon death

Inheritance tax in Spain is a different matter than the annual levies you pay while owning property. It is not about what a Spanish asset costs you per year, but about what happens the moment that asset is transferred to your heirs. For assets located partly in Spain and partly in the Netherlands, this is a question involving two countries.

This page outlines the main points. What Spain levies, what the Netherlands levies, how double taxation is mitigated, why Andalusia has an exceptional position, and why the difference between direct ownership and participation in a project is once again decisive here. This is an explanation of the system, not advice regarding your own estate.

Why inheritance tax in Spain is separate from your annual tax

During ownership, you pay IBI in Spain and, as a non-resident, income tax for non-residents. In addition, Spanish wealth tax plays a role above the exemption thresholds. These levies are annual and easy to estimate. They are described in the article on taxes on Spanish real estate.

Inheritance tax works differently. It is a one-off event, at a time you do not plan, and it does not affect your own position but that of your heirs. Moreover, in Spain, it is levied on the recipient rather than the estate as a whole. Each child is assessed individually.

That makes it a structural issue rather than a cost item. Choosing the form of your Spanish asset also means choosing the route your estate will follow.

Who levies what: Spain and the Netherlands compared

For a Dutch testator with Spanish assets, two systems come into play simultaneously. They do not align, as there is no tax treaty between the Netherlands and Spain governing inheritance tax.

The Spanish ISD

Spain levies the Impuesto sobre Sucesiones y Donaciones (Inheritance and Gift Tax). The national tax brackets range indicatively from approximately 7.65 percent to approximately 34 percent, after which a multiplier is applied based on the relationship and the heir's pre-existing wealth.

It is important to note that for non-residents, Spain levies tax on assets located in Spain. A Spanish home falls under this category. Since the rulings of the European Court and the adjustment of Spanish legislation, non-residents are permitted to apply the regional rules of the region where the property is located. This difference is significant, as the regions vary greatly from one another.

Dutch inheritance tax

If the testator lived in the Netherlands, the Netherlands levies inheritance tax on their worldwide assets. The Spanish home or Spanish participation is therefore simply included. The rates range indicatively from 10 to 20 percent for partners and children, and from 30 to 40 percent for other beneficiaries, after applying exemptions.

For Dutch citizens who have emigrated to Spain, the ten-year rule also applies. The Netherlands continues to levy tax for ten years after emigration as if the testator were still living in the Netherlands. This point is frequently overlooked when moving to the Costa del Sol.

Prevention of double taxation

Because there is no treaty, the prevention of double taxation is handled through the Dutch unilateral regulation. In general, the Netherlands grants a reduction for real estate located abroad on which the other country has levied tax. The reduction is limited and functions as a credit, not as a full exemption.

This is the point that surprises most investors. That reduction is linked to real estate. If you do not hold Spanish real estate but rather a claim on or an interest in a Spanish company, the route is different and the outcome is not the same. Have this calculated for your specific situation.

Andalusia: why the region makes the difference

In Spain, the ISD has largely been devolved to the autonomous regions. Andalusia, which includes the Costa del Sol, has one of the most generous schemes in the country.

For heirs in groups I and II—children, grandchildren, parents, and spouses—there is a reduction in the order of 1,000,000 euros per heir. Furthermore, a 99 percent discount on the tax due applies to the amount that remains taxable after that.

In practice, this means that for many estates, the Spanish tax levy remains very limited. However, conditions and thresholds vary by situation and are subject to change, and they do not apply to heirs outside of groups I and II. Therefore, treat the mentioned amounts as an indication rather than a final outcome.

If the property is located in a different region, the situation is different. This is why it is important to know the region in which the property is located when dealing with a Spanish asset, which is also part of the research described in the article on <a>due diligence for a Spanish real estate project</a>.

Direct ownership or a participation: the difference has consequences

If you own a Spanish property in your own name, there is an asset located in Spain that is being transferred. The Spanish inheritance tax (ISD) comes into play, the regional regulations apply, and the Netherlands provides a reduction for the foreign real estate.

If you participate in a project, you do not hold real estate but a claim on or an interest in a company. The company owns the property, as described in the article on <a>investing via a Spanish S.L.</a>. For inheritance tax purposes, this changes the nature of what is being transferred.

This can work both ways. On the Spanish side, you are generally exempt from the levy on assets located in Spain when holding a claim. On the Dutch side, this also eliminates the basis for the reduction that does apply to real estate. Whether this works out more or less favorably on balance depends on the size of the estate, the relationship of the heirs, and the region in which the property is located.

If you hold the position through a company, an extra layer is added, as the shares in your own holding company are inherited rather than the Spanish position itself. You can read more about what holding participation entails in the article on real estate through your holding company.

What needs to be arranged in practice

In addition to the tax route, the settlement process is involved. Four points require attention and all four can be arranged in advance.

• The will. Under the European Succession Regulation, you can choose to have the law of your nationality apply. A separate Spanish will for the Spanish portion is standard practice and is registered in the Spanish Central Registry of Wills
• The deadline. In principle, the Spanish tax return must be filed within six months of death. A six-month extension is possible if requested in a timely manner
• The heirs' NIE. Heirs require a Spanish tax identification number to file the tax return and to have the property transferred to their name
• The plusvalía municipal. When a Spanish property is transferred, the municipal tax on the increase in land value is also due

Count on a lead time of several months for the entire process. Heirs who only discover after the death that there is a Spanish component lose part of that time mapping out the position.

A calculation example with a downside scenario

Suppose a testator living in the Netherlands leaves a Spanish property in Andalusia with a value of 800,000 euros to one child. All amounts are indicative and serve for illustration purposes only.

On the Spanish side, the acquisition falls within the reduction for group II, keeping the Spanish levy limited. On the Dutch side, the property is included in the estate and inheritance tax is levied according to the rate for children. Because Spain levies little or nothing, there is little to offset, and in practice, the tax burden falls almost entirely on the Netherlands.

Now for the counter-scenario. If the same property is located in a region without a generous discount, the Spanish levy can increase. In that case, the Netherlands provides a reduction, but it is limited to the amount that can be proportionally attributed to the Spanish property. If the Spanish levy is higher than that limit, a portion remains uncredited.

The pattern is therefore the opposite of what is often thought. A low Spanish levy does not automatically lower the total burden, because the Netherlands absorbs the difference. A high Spanish levy is not automatically fully compensated. The outcome depends on the relationship between the two, and that varies per estate.

Common mistakes

Four misconceptions consistently recur regarding assets with a Spanish component.

• Assuming that the Andalusian discount means no inheritance tax is due on the Spanish property, while the Netherlands levies tax on the same assets
• Assuming that emigrating to Spain immediately ends Dutch taxation, while the ten-year rule continues to apply
• Choosing the structure of the Spanish position based on annual yield rather than what happens upon death, even though the treatment in box 3 and inheritance tax share the same structural considerations
• Failing to draw up a Spanish will, which causes the settlement process to take longer and puts pressure on the six-month tax filing deadline

Frequently asked questions

These are the questions that arise most frequently once a Spanish position becomes part of an estate.

Do my heirs have to file a tax return in Spain?

If an asset located in Spain is transferred, there is in principle a filing obligation for the ISD, even for non-residents. If you only have a claim on a Spanish company, the situation is different. Have this assessed for your specific situation.

Is a Spanish will mandatory?

No. A Dutch will can cover Spanish assets. However, a separate Spanish will speeds up the settlement process because it is registered in the Spanish system and can be requested directly from a Spanish notary.

Can Spanish tax be offset against the Dutch tax assessment?

For real estate located abroad, the Netherlands has a unilateral regulation that leads to a reduction. This reduction is limited. For other assets, the effect is different. This is a point that should definitely be calculated in advance.

What happens if the tax return deadline is missed?

Spain imposes surcharges and interest for late tax returns. An extension of six months is possible, provided it is requested within the first five months. This is one of the few points in this process where acting in time directly saves money.

Does anything change if the project is still ongoing at the time of death?

The position is transferred in its current state, including the remaining term. What happens to the participation is determined by the agreement. Whether transfer to heirs is possible without further ado should be stipulated therein.

Can Spanish rules still change?

Yes. The ISD is regulated regionally, and the rules have been adjusted several times in recent years. Keep in mind that percentages, reductions, and conditions can change during the term of a position.

Next steps

Address this issue in this order. First, map out the form of your Spanish position, then determine where the object is located and which regional regulation applies, then look at the Dutch side and the reduction, and only then arrange the will. Starting with the will sets a path before it is clear which route is most favorable.

Would you like to see how a concrete project proposal is structured, including the legal form and the transferability of your position? Schedule a personal appointment.

This article is general in nature and does not constitute legal or tax advice.