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De Cotta Is it all over for the waiting game? One way of evading Spanish Inheritance Tax may be about to end. By Jon Sutton & Francisco Martin, Lawyers at De Cotta Law. Many people may know it is a quirk of the Spanish tax system that taxes prescribe. This means that after a certain period of time, if the taxes have not been declared and paid and the Tax Office hasn’t taken any steps to enforce the tax then, it prescribes and the Tax Office is barred from taking action to enforce the tax. This method of not paying taxes has always been illegal tax evasion rather than a legitimate avoidance scheme. However it has often been used in Spain, both by Spanish families and by foreigners as a way of not paying the rather harsh inheritances taxes which are levied in Spain and in particular in Andalucía (where allowances are less generous than other regions). The prescription period for inheritance tax is four and a half years from the date of death. Although it has been used successfully to avoid tax by many people in the past, it was never a preferable course of action. As well as being illegal, it was also risky and meant that
the property could not be sold for four and a half years at least after the death of the previous owner. Added to this is the significant problem which can be caused if the intended recipient themselves died within the waiting period before having officially accepted their inheritance. The tax office have now got wise to this particular method of evasion and have come up with quite a clever way of closing the loophole. They are checking through the death certificates of all the people who have died in the locality of the tax office and are cross referencing the names of the deceased people with the Land Registry records. In this way they are identifying estates where the inheritance tax has not been declared. When “evaders” have been identified, the tax office levies interest on the tax which is 5% of the tax after six months from the date of death and increases by 5% every three months thereafter up to a total of 20%. More serious than the interest are the fines which the tax office can levy if deliberate evasion is suspected. It is possible that the beneficiaries are distant cousins or suchlike who were not aware of the death in which case they will only be charged the interest. However, if the beneficiaries are close relatives or even co owners of the property, deliberate tax evasion will be assumed. Depending on the size of the estate and the evidence as to whether there was a deliberate attempt to defraud the tax office, the office, the offence will be considered light, serious or very serious. The fines can vary from 50% to 150% of the tax due which could equate to many tens of thousands of €’s. If the tax is paid immediately, the tax office are likely to be more lenient. This new initiative has led to some confusion because where there are non resident beneficiaries or the deceased was non resident, the tax declaration is done at the central tax office in Madrid. However there is little communication between the central tax office and the regional tax offices. This has led to a situation where people who have correctly declared and paid their tax in Madrid are receiving tax demands from the local tax office. If this occurs, beneficiaries receive such a demand they need to go to the local office with proof that the tax has been declared, or employ a lawyer to do so.As mentioned in a previous article, pressure from the European Union may lead to a dramatic overhaul of the Spanish inheritance tax system. This initiative by the tax office may therefore be short-lived. However, in the meantime, it should not be ignored.