DEDUCTIBLE AMOUNTS IN THE INHERITANCE TAX

If you’re not Spanish but you either receive assets that are located in Spain or you are considered tax resident in Spain, you will have to pay the Spanish inheritance tax. Therefore, it’s certainly useful to know which amounts can reduce the tax to pay.

In order to calculate the inheritance tax, we not only have to take into account the assets –goods and rights that we receive– but also the liabilities, which are deducted from the value of the assets to give the net result.

The tax law breaks down the liabilities into three different types: charges, debts, and expenses. Although, at first glance, mortgages could be considered charges, the law makes it clear that they are not. There has been some debate in this regard, since, if they were considered a charge, not only the principal of the loan could be discounted, but also the interest, since the property responds for the entire amount. However, the law leaves no room for doubt and expressly excludes this possibility.

As for the debts, the mortgage loan is included here, but only in terms of the principal, without being able to take into account the interest owed. It should also be noted that, although it is true that the law begins by requiring that the debt be recorded in a public document or in a private document that meets certain requirements, it is also true that it later clarifies that it will be enough to justify the existence of the debt by any means. Therefore, as long as the existence of the debt can be proven, it will be deductible. However, it also establishes an exception, as it excludes the possibility of deducting the debts in favour of the heirs and of the spouses, ascendants, descendants or siblings of those heirs. Therefore, if the deceased owed money to any of his heirs or relatives of these, the debt cannot be deducted.

As the law speaks of heirs in general, one might wonder if it refers only to those freely designated by the deceased or if it also includes legal heirs –those who are entitled to a part of the inheritance by legal imposition–. The law does not distinguish between these two groups at any time, so it would be logical to think that, in this case, it is also referring to all of them. The spirit of the rule is to avoid fraud, that is, to prevent the simulation of the existence of a debt that minimizes the net result so that no taxes are paid. Taking that into account, the type of heir should not really play a role, since the possibility of faking the existence of a debt exists with all of them.

The reasoning behind this is definitely reasonable, however, the rule is interpreted very strictly. Although there is no definitive answer, it has been understood that, even if there is a court ruling that recognizes the existence of the debt, it will not be deductible. That is, even when the creditor heir has sued the deceased and the judge has acknowledged the existence of the debt, it may not be deductible.

This consideration that, under no circumstances, despite the evidence, will the debt be deductible, is what is known as a iuris et de iure presumption. This type of presumption does not admit evidence to the contrary, so even when it is clear that the presumption is not correct, the solution adopted by law will be maintained –in this case, not to recognize the existence of the debt–. On the other side of the coin, we have the iuris tantum presumptions, which do admit proof to the contrary. Precisely to avoid the injustices that can be caused by the first type of presumptions, the latter are usually used more often, leaving the former only for exceptional cases. Therefore, it is worth asking if we are dealing with one of those cases in which its use is justified.

It is true that the simulation of the existence of the debt is relatively simple, so the recognition of its deductibility could lead to a wave of falsifications. However, there are a wide range of options between not recognizing the debt under any concept and accepting it without any control. The problem is that it seems difficult to find an objective criterion that is easy to evaluate, so each specific case would have to be studied. This requires a lot of resources and the Administration is already saturated enough to add something like that.

However, it must be taken into account that the law only prevents the deduction if the debt is in favour of their heirs or relatives. That is, nothing prevents doing the same operation with someone very friendly and trustworthy, thus avoiding the norm. Moreover, because of this, you could achieve the absurd result of letting people who are willing to simulate the existence of a debt continue to do so with their friends, while having the ones who have a real debt pay the consequences without being able to deduct it.

Finally, in terms of deductible expenses, these include certain legal expenses and, the most common, last illness, burial and funeral expenses. In addition, these last two must be proportional to the hereditary wealth, taking into account the uses and customs of the area.

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Estudio Jurídico y Económico