Deductible expenses of an inheritance in Spain
Having a loved one die is not a very pleasant experience for anyone. Nor is having the tax office pass by your house. It is clear that inheritance tax is a robbery because you pay tax on something that your relatives have already paid in the past. That is why you should not give anything away to the tax authorities and it is very important to take into account the deductible expenses of an inheritance when settling the tax.
When settling an inheritance, remember to compute those charges, debts or expenses that allow you to reduce the taxable base for Inheritance Tax. See below what these deductible items are…
Deductible charges of an inheritance
Charges on assets of the Inheritance that are of lesser value
When valuing the assets of the inheritance, remember, first of all, to deduct any charges or encumbrances which reduce the value of the assets and which meet the following requirements:
- That they are of a perpetual, temporary or redeemable nature and affect the assets.
- They must be directly established on the property. These types of encumbrances are usually registered in the Land Registry, so you can find out about their existence by requesting a simple note from the Land Registry.
What types of charges are there?
This is the case, for example, of easements, or censuses or pensions; or if a property is subject to an old rent, in which case this circumstance can also be taken into account when valuing the property.
Security rights in rem (mortgages, pledges, etc.) cannot be deducted, as they do not reduce the value, without prejudice to the deduction of the debts they are securing.
For the purposes of deduction, the value of a census or a pension is taken to be the value of the capital sum to be paid in redemption.
This value can be calculated by capitalising it at the legal interest rate, i.e. from the result of dividing the annual pension or census by the legal interest rate and applying the rules established for valuing usufructs (depending on whether the pensions or censuses are for life or temporary).
Debts deductible from an inheritance
When are debts deductible in an inheritance?
Debts of the deceased
Debts that the deceased had outstanding at the time of death can also be deducted from the ISD taxable base. To prove their existence, a public (notarial, judicial or administrative) or private document with a reliable date can be presented, as well as any other element of proof admitted by law (the TEAC has also admitted invoices as sufficient justification.
However, to ensure that the debt is real, the tax authorities can require the heirs to recognise it in a public document, with the creditor’s appearance.
Tax debts
In particular, debts owed by the deceased for taxes owed by the State, autonomous communities, local corporations or Social Security and which are paid by the heirs, even if they correspond to settlements issued after death, are deductible.
Inheritance and Gift Tax already settled
It may happen that, after the death and after having settled the ISD, the existence of some of the deceased’s debts becomes apparent. Well, in this case, the heirs could rectify the ISD presented -provided it is not time-barred- to include the new debt and claim the refund of the amount paid in excess.
Procedure for deducting debts
To do so, a special procedure for the deduction of debts must be followed, which must comply with the following rules:
Such deduction of debts will be effective by means of a refund without interest for late payment of the ISD paid in excess.
The interested parties must submit their request for rectification in writing, attaching the documents proving that the debt exists and that it has been paid (it is not possible to rectify the ISD if the debt is still outstanding).
Non-deductible debts in an inheritance
Debt Non-deductible
The law prohibits the deduction of debts when the creditor is the heir himself (as such debt is offset). Nor can debts in favour of a spouse, ascendants, descendants or siblings be deducted. However, if the money lent to the deceased, or the assets acquired with the money received, were in the deceased’s estate at the time of death, it is possible to defend the non-inclusion of its amount in the ISD base of the inheritance.
An heir had lent money to the deceased a few days before his death and, at the time of death, the money was still in the deceased’s current account. In this case, it can be argued that this part of the balance should not be included in the inheritance (as the debt is not deductible).
Causal guarantor
The fact that the deceased is a guarantor for a third party does not, in itself, mean that the heirs can deduct any debt in the ISD (unless they have ended up being liable for a debt, and provided that this debt has been judicially recognised and its amount has been clearly established). However, please note that such a debt is not deductible if the deceased has a right of return against the principal debtor.
The debt is neutralised by the claim arising from the right of return, which allows a claim against the principal debtor. However, if there is no right of return because the debtor is declared bankrupt, the claim is deductible.
Distribution of inheritance debt
Proportional distribution of debt in an inheritance
Unless the deceased has provided otherwise, the heirs can deduct their debts (when calculating the ISD taxable base) in proportion to the share of the value of the inheritance that corresponds to each of them. On the other hand, if the deceased has arranged for a debt to be assumed by a specific heir, only that heir can deduct that debt from the value of the assets received from the inheritance.
This is what happens if a son inherits a property from his father as a legacy and the latter establishes in the inheritance that it will also be that son who will have to assume all the outstanding debt of the mortgage loan that was requested to acquire the property.
In general, the heirs are jointly and severally liable for the outstanding debts of the deceased, without prejudice to the right to claim against the other heirs if these are only assumed by one of them (provided that the will does not stipulate that it is he who must assume the debts).
Collect the documents proving the existence of the encumbrances on the assets as well as the debts and expenses incurred by the heirs. Keep these documents in case the tax authorities check them at a later date.
ISD deductible expenses
What expenses are deductible in an inheritance?
Litigation expenses
On the other hand, when calculating the ISD taxable base, certain expenses paid by the heirs are also deductible.
Firstly, expenses for litigation or arbitration arising from probate or intestate succession are deductible when they are of a litigious nature.
To be deductible for ISD, these expenses must be justified and meet the following conditions:
They must have been incurred in the common interest of all the heirs (litigation expenses between heirs are not taken into account).
They must not relate to expenses for the administration of the estate, including expenses incurred by the executors, including their remuneration, and by the accountants.
Last illness expenses
Medical, pharmacological or therapeutic expenses directly related to the illness that caused the death of the deceased can also be deducted. They must have been paid by the heirs, as the expenses paid by the deceased already reduce the estate existing at his death.
The deduction of expenses for invoices or receipts for medicines and medical treatments from around the time of death related to the illness is allowed.
Burial and funeral expenses
Lastly, expenses for funeral services can be computed in the name of the heirs, up to the limit of the usual expenses in accordance with local customs and practices. Even if these expenses are paid in full by one of the co-heirs, they are deducted from the total estate and not from the share of the co-heir who paid them.
