Quite apart from any illegality, “clever” schemes to try and evade tax can have undesirable and costly consequences.  In particular, the practice of delaying an application for Spanish Probate until the 4 year and 6 month limitation period for the payment of inheritance tax has passed can cause misery for the beneficiaries of an estate.

 For example, Mr. X and Mrs. X were English and jointly owned a holiday home in Spain in equal shares.  In the 1980s they both made English Wills leaving their estates to each other, with their estates ultimately passing to their children.  Their Wills named a solicitor and an accountant as executors. 

In 2005 Mrs. X died and her estate passed to Mr. X    Under English law there is no inheritance tax on gifts made between spouses.   As the late Mrs. X only had a very small estate in her sole name in England – a small life insurance policy, and some cash in the bank - it was not necessary to obtain Probate for her English estate. 

However, Probate should have been obtained so as to deal with her share of the Spanish property and transfer it to Mr. X, who survived her.   Unlike in the United Kingdom there is only a small exemption in Spain for Inheritance Tax on gifts between non-resident spouses, so Mr. X would have to pay Spanish Inheritance Tax on receiving his late wife’s share of their holiday home.

To try and evade Spanish Inheritance Tax Mr. X was advised not to obtain Probate immediately and deal with the transfer of his late wife’s share in the Spanish Property to himself, but to wait until the limitation period for paying Spanish Inheritance Tax had passed and so save the tax.   

In 2007 Mr. X remarried and he and his new wife made new English and Spanish Wills, leaving their estates to each other, and in their English Wills, appointing each other as Executors.   

In 2009 Mr. X also died, after the limitation period for paying the inheritance tax on his first wife’s share in the estate had expired, but before the share of the first Mrs. X had been transferred to him.

The second Mrs. X now wanted to sell their Spanish holiday home, but she was faced with following problems:

• Trace the original executors for the English Will of the late first Mrs. X.  As more than 20 years   had passed since the first Mrs. X made her Will, they might themselves have moved or died.   This might involve placing advertisements in the local papers for the areas where they had lived asking them to come forward, or engaging enquiry agents.  If they had died and left Wills appointing executors, under a little known rule of English Probate Law known as the “chain of representation” contained in the Administration of Estates Act 1925 their own executors would also have administer Mrs. X’s estate.  If there were no executors surviving family members would have to obtain “Letters of Administration”, for an unadministered estate known as “de bonis non administratis”
• Obtain English Probate for the entire of Estate of the first Mrs. X, including her share in the Spanish Property.  She would have to obtain a valuation of the property as at the date of her death in 2005, and pay the English Probate fees.
• Get the English Probate translated, and legalized by the Foreign and Commonwealth office before applying for Spanish Probate of the Spanish estate of the first Mrs. X.
•  Either arrange for the executors, or administrators, of the estate of the late First Mrs. X to come to Spain for the transfer of the Property, or arrange for them to grant Powers of Attorney in favour of a representative to act  on their behalf. 
• Transfer the share in the Spanish Property of the late First Mrs. X to the estate of the late Mr. X, and then transfer the entire property to herself.
•  All of this would delay obtaining Spanish Probate of the late Mr. X’s Spanish estate, and the sale of the Spanish Property.  If more than 6 months had passed since the date of his death, surcharges would be applied to the Inheritance Tax which would either have to be paid by the second Mrs. X or deducted from the proceeds of sale of the Spanish property reducing her legacy.
•  Pay the additional legal costs for all this extra work done by her lawyers.

So what had been achieved by following the advice of not to obtain Probate of the estate of the first Mrs. X?  Sure, some tax had been saved by waiting 4 years, but if the value of the Spanish property was not large, much of this saving could be negated by a long delay in obtaining Probate of the estate of the late Mr. X. 

The grief and sadness which accompany the loss of a partner would have been compounded by the aggravation of such a convoluted administration of an estate.

A lot of ill feeling would have been created between family members

The second Mrs. X would have received a smaller legacy.

The lesson of this sad state of affairs is not to leave matters to chance, and review your Wills and financial planning regularly through a qualified adviser.

Written by Michael Olmer for Link Point Legal & Business Services on the 17th March 2010