When a person dies and leaves some assets to her/his heirs, the heirs are usually required to pay an "Inheritance tax".

On the other hand, when we receive a donation or gift exceeding a certain value, we are also obliged to give part of it to the Government by means of "Donation Tax". In practice, both taxes, which in principle are very different, are paid through the same tax, the "Tax on Inheritance and Donations".

These two taxes are being managed by the Spanish autonomous communities, i.e., the Governments of the autonomous communities can decide about them.

This tax must be paid by:

Documents and payments related to this Tax can be submitted in any Provincial Office of the Department of Economy and Finance, of the corresponding Autonomous Community, which will be: For "mortis causa" acquisitions, the Autonomous Community where the deceased lived. For "inter vivos" acquisitions, the Autonomous Community where the "real estate" is or, lacking that, the purchaser’s usual place of residence.

The big news is that The Autonomous Community of the Canary Islands, as of the 1st of January 2008, has practically suppressed, within family unit (parents, children, spouses and common law couples), the Inheritance and Donations Tax, thanks to the general bonus of a 99,9% tax rate. The Autonomous Community has kept the remaining 0.1% to be paid as a means of tax control. I.e., heirs need to submit the Inheritance and Donations Tax report after the death of the person who has left an inheritance in Spain.

Donations

For example, a donation of 60,000 euros from a father to his child younger than 35, to help him with the purchase of his house (principal place of residence), the donee used to pay, until last December, 3,294.44 euros, but now, in application of the 99,9% bonus, he will only have to pay 3.29 euros.

Inheritances

Likewise, if three children and a 70 year old spouse inherit a bank account, a stock portfolio and a flat, all valued (including household furnishings) at 200,000 euros, the contribution for the Inheritance Tax would be today, for each child, 3.86 euros, and 0.57 euros, for the spouse; while the previous year, when such bonus did not exist, the children and spouse would have had to pay 3,863.10 euros and 573.75 euros, respectively.

Requirements to apply the reduction of 99,9% of the Tax

A) In donations

1.- Execution and acceptance of the donation must occur after 1 January 2008.

2.- The donee must be within the first and second degrees of kinship: parents, children, spouses or common-law couples.

3.- Donation must be signed by a Notary Public.

4.- The donee must live in the islands, not only at the moment of the donation but also during the last 5 years. However, if the donation consists of real estate, the Law requires that such properties are in the Canaries.

B) In /mortis causa/ inheritances

1.- That the due date for the payment of the Inheritance and Donations Tax is after 1 January 2008, i.e., that the death occurs after such date.

2.- That the taxpayer (heir, legatee or beneficiary of a life insurance policy) is within the first and second degrees of kinship: parents, children, spouses or common-law couples.

3.- That the deceased party has lived permanently in the Canaries, not only at the moment of his/her death, but also for the last 5 years.

The reduction is not applicable when the death has occurred before 1 January 2008, even if the tax report is submitted during 2008.

Conclusion

The tax has been virtually eliminated as of 1 January 2008 as it has been reduced by 99%. Nevertheless, the requirements to be exempt must be met and documents must be submitted to the Department of Economy and Finance of the Government of the Canary Islands.