A trust is a legal arrangement used in countries such as the United States and the United Kingdom, but it is not recognised in Spain. Here AGM Abogados explain the issues around the use of trusts and inheritance tax in Spain.

Written exclusively for Expat Network by Dimitrichka Nedelcheva Anghelova, Tax and Fiscal Lawyer. AGM Abogados

Definition of a trust

According to the 1985 Hague Convention, a trust is established when one person (the “settlor”) places assets under the control of another (the “trustee”) to administer them for the benefit of a third party (the “beneficiary”).

Complications of trusts in Spain

When a trust is received as an inheritance, complications arise in Spain since the arrangement is not legally valid. This means that the Spanish tax authorities consider that the assets are transferred directly between the settlor and the beneficiary, without taking the trustee into account.

Tax implications for Spanish beneficiaries

If Spanish beneficiaries receive assets through a trust, they are subject to Spanish inheritance tax. This tax is levied on the value of the inherited property and accrues at the time of the settlor’s death. The obligation to pay this tax falls on the beneficiary, who must declare the goods received and pay the corresponding tax.

Different regional tax rates

The tax rate and the basis for calculating inheritance tax may vary depending on the region, as well as the beneficiary’s relationship to the deceased and other factors. In some regions, there are reductions or discounts that can be applied, but they generally do not include trusts, thus further complicating the situation.

Suspensive clauses in trusts

An additional aspect to consider is the suspensive clauses that may be included in a trust contract. Such clauses set out conditions that must be fulfilled before the assets are transferred. In this case, the tax accrues when the condition is fulfilled or the limitation set out in the trust is removed.

Applying article 24.3 of the Spanish Inheritance and Gift Tax Act

According to article 24.3 of the Inheritance and Gift Tax Act (LISD), acquisitions of assets whose effectiveness is suspended are deemed to have been made when these limitations disappear. This means that, if the beneficiary has to wait for a condition to be fulfilled in order to access the assets, the tax will not accrue until that condition is fulfilled.

The importance of reviewing the trust’s conditions

As a result of the complex tax treatment of trusts in Spain, the beneficiaries must carefully review the terms and conditions of the trust. This includes understanding the tax implications, the moment when the taxes accrue and the reporting obligations.

Different interpretations by the Spanish tax authorities

The beneficiaries must be aware that, since the Spanish tax authorities do not recognise trusts, they may interpret the transfers differently than in other countries where trusts are an accepted legal arrangement. This may lead to an unexpected tax burden or the need to comply with reporting requirements that were not anticipated when setting up the trust.

Challenges of a trust as an asset planning tool

The use of trusts as an asset planning tool poses significant challenges in Spain. The lack of legal recognition and the related tax complications can make it difficult to manage the inherited assets.

Conclusion: The importance of consulting the professionals

Those who are considering setting up a trust or have inherited assets through a trust should consult a legal or tax professional who understands both international and Spanish law. In this way, they will be able to optimise their asset planning and comply with the relevant tax obligations, thus avoiding unpleasant surprises in the future.