Inheritance tax in the Canary Islands

Author: Esther R.

Profession: Lawyer

Completed cases: 77

Esther has been assisting expats with inheritance and general property matters for the last 20 years and is well-known for her expertise in these fields of Spanish law.

View Esther's full Bio

Author: Esther R.

Esther has been assisting expats with inheritance and general property matters for the last 20 years and is well-known for her expertise in these fields of Spanish law.

Speaks languages:

View Esther's full Bio

Regional allowances are typically much more generous than those permitted by the central government, so it is vital to understand how you can benefit from them and reduce your Spanish inheritance tax liability. 

The information below relates to Inheritance Taxes in the Canary Islands, which applies to Tenerife, Gran Canaria, Lanzarote and Fuerteventura, and while valid and updated for 2024, is, by necessity, general in nature. It is highly recommended that you contact a specialist in probate matters in the Canary Islands, since fiscal matters are highly complex, and deeply dependent on the circumstances of each individual.

The Canary Islands initially introduced specific reductions and improved national ones, alongside tax relief measures, including a 99.9% tax rebate. These measures were formalized in various laws, starting in 2004, and aimed to ease the financial burden on families during economic downturns, particularly in 2008. The tax relief was later removed in 2012 due to austerity measures to reduce public deficits but reinstated in 2016 amid economic recovery to address challenges such as families renouncing inheritances due to tax liabilities.

In 2019, the rebate scope was expanded to cover more distant relatives (Group III), while in 2020, the rebate was gradually reduced for higher tax liabilities. This measure aimed to balance fiscal capacity with the region's economic and social commitments.

Amid recent inflationary pressures, the current government has prioritized a fair and progressive tax policy to ease the financial strain on families and stimulate economic activity. To achieve this, the Canary Islands are reintroducing a 99.9% rebate for the Inheritance and Gift Tax, citing the unjust nature of double taxation and the need to support household incomes while ensuring economic stability.

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The regional level exemptions available in the Canary Islands were brought into force by the regional parliament in Las Palmas in 2009, with the latest amendment promulgated under Law 5/2023.

Spanish Inheritance law first assigns beneficiaries to groups according to the degree of kinship with the deceased:         
 

1. Group I: Children, including adopted children, under the age of 21
2. Group II: All other descendants, spouses and parents
3. Group III: Close relatives such as brothers and sisters, grandparents, aunts and uncles
4. Group IV: More distant relatives

The following are the additional deductions available in the Canary Islands:

1. Group I: The deductions for children depend on the age of each child:
   1. Under 10 years: 100% up to €138,650
   2. Under 15 years: 100% up to €92,150
   3. Under 18 years: 100% up to €57,650
   4. Under 21 years: 100% up to €40,400
2. Group II: Spouse: €40,400; Child: €23,125; Other Descendants, Ascendants: €18,500
3. Group III: €9,300
4. Group IV: No deductions available

Note, when we speak of deductions, we mean that the amount you would be taxed on is deducted by a set percentage before applying the rate of tax. So, if you have inherited €100,000 and are entitled to a deduction of 95%, this means you will pay tax at whatever rate is appropriate to you - on €5,000 only.

On the other hand, when we speak of discounts, this is applied to the amount of tax you have to pay. So, if after applying any deductions you have to pay €1000 in inheritance tax, and you are entitled to a discount of 99%, this would mean you would only have to pay €10. 

As an example, an inheritance of €10,000 (after all other deductions applied) would attract inheritance tax of €611.50 (tax applicable up to €7,993.46) + €2,006.54 (balance up to €10,000) @ 8.5% = €782.06.

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To take the earlier example, but assume that the beneficiary who inherits the €10,000 is a sibling of the deceased - with pre-existing wealth of €1,000,000, the initial inheritance tax is calculated in the same way: €782.06, but then must be multiplied by the appropriate coefficient for siblings with this pre-existing wealth of more than 402,678.11 and less than 2,007,380.43 =  1.6676 which would result in an inheritance tax total of: €1304.16.

Beneficiaries over 75 years old

A deduction of €125,000 applies to beneficiaries aged 75 or older.     
 

Deductions for the Disabled

For those with a disability between 33% and 65%: €72,000     
For those with a disability of 65% or greater: €400,000

Inheritance of Life Insurance Policies

A 100% deduction applies to life insurance policies up to €23,150 where the beneficiary is the spouse, ascendant, descendant, adoptive parent or adopted child.     
 

Inheritance of the Family Business

A 99% deduction applies for spouses, descendants or adopted children, and 95% for parents, adoptive parents and collateral (non-blood) relatives up to the third degree, on the value of a business or professional activity or shares in companies, provided that:

1. The inheritance qualifies for exemption under state wealth tax rules in the two years prior to death
2. The assets are maintained for 5 years
3. The business activity, management and control remains in the Canary Islands for 5 years after death

Inheritance of Cultural Heritage

A 97% deduction applies to assets that form part of the Historical or Cultural Heritage of the Canary Islands when inherited by spouses, parents or adopted children, provided the assets are maintained for at least 5 years.

Inheritance of Rural Properties

A 97% deduction applies to rural properties located within protected natural spaces in the Canary Islands, provided they are maintained for at least 5 years.

Multiple Inheritances

When the same assets are inherited multiple times within a 10-year period by spouses, descendants or parents, the following additional reductions apply to the second and subsequent inheritances:

1. 50% if inherited within 1 year of the previous inheritance
2. 30% if inherited between 1-5 years of the previous inheritance
3. 10% if inherited more than 5 years after the previous inheritance

A 99.9% rebate applies to inheritance tax for beneficiaries in Groups I, II and III, effectively reducing the tax burden to a minimal amount for close relatives.

Special 100% tax relief measures apply until December 31, 2026, for those who lost property in the La Palma volcanic eruption of 2021, including:

1. Cash donations for purchasing replacement property
2. Gifts of buildings in La Palma
3. Gifts of building plots for new homes
4. Gifts of rural land

These measures require the replacement property to be maintained for at least 5 years and are subject to specific documentation requirements.

To process an inheritance in the Canary Islands, beneficiaries typically need to:

1. Obtain the death certificate
2. Secure proof of their right to inherit
3. Gather necessary documentation
4. Calculate applicable deductions and rebates
5. File the inheritance tax declaration
6. Pay any tax due
7. Register inherited assets in their name

Given the complexity of inheritance regulations and the significant tax implications, it is highly recommended to seek professional legal advice when processing an inheritance in the Canary Islands.

The possibility of ‘gifting’ assets in advance of  - and instead of - the assets passing through inheritance is often considered, especially by those with family heirs resident in the Canary Islands. The relative benefits of choosing this option can vary greatly, and it is a complex area.  

A 99.9% rebate applies to gift tax for recipients in Groups I and II (spouses, children, and direct descendants), effectively making most family gifts nearly tax-free. However, there are two important requirements:

1. The gift must be formalized in a public document
2. This bonification cannot be applied to multiple donations within a 3-year period unless the donor dies within that period

A 95% reduction applies to gifts of businesses, professional practices, or shares in companies when:

1. The donor is 65 or older or permanently incapacitated
2. The donor has been running the business personally and directly
3. The business income constitutes at least 50% of the donor's total income
4. The recipient maintains ownership for at least 5 years
5. The gift is formalized in a public document

An 85% reduction, up to €24,040, applies to cash gifts to children and descendants for purchasing their first home, subject to:

1. The recipient must be under 35 years old
2. The property must be purchased within 6 months
3. The home must remain in the recipient's possession for at least 5 years
4. For disabled recipients, the reduction increases to 90% (up to €25,242) for those with 33-65% disability, and 95% (up to €26,444) for those with more than 65% disability

An 85% reduction, up to €100,000, applies to cash gifts to descendants under 40 for starting or acquiring a business, professional practice, or shares in companies, provided:

1. The business must be established in the Canary Islands
2. The recipient's net worth must not exceed €300,000
3. The business must be established within 6 months
4. The business must be maintained for at least 5 years
5. There must be no prior connection between the recipient and the business being acquired

As can be seen, there can be important tax reductions when gifting assets in the Canary Islands, especially when to children and close family members.

Tax residents in the Canary Islands must fulfil Spanish inheritance tax obligations when inheriting assets located abroad. This is particularly relevant for the islands' substantial international community, many of whom maintain assets in their countries of origin.

The application of Canarian regional deductions, rather than state-level rules, is crucial for optimising tax efficiency. This can lead to significant tax savings, especially given the Islands' generous 99.9% rebate for Groups I, II, and III beneficiaries. This favourable treatment could potentially extend to foreign assets such as overseas properties or investment accounts.

For inheritances involving assets in countries that have Double Taxation Treaties with Spain (notably Sweden, France, and Greece), specific regulations govern the taxation process. These agreements establish which jurisdiction has primary taxing rights and provide mechanisms to prevent double taxation. Each treaty has unique provisions that must be carefully considered when calculating inheritance tax liability.

Beyond inheritance tax considerations, beneficiaries must also comply with Spain's foreign asset reporting requirements. After inheriting foreign assets, tax residents must declare these on Form 720 (Modelo 720). This tax return is separate from inheritance tax obligations and carries substantial penalties for non-compliance or late filing.

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How to avoid inheritance tax in Canary Islands?

As of 6 September 2023, inheritance tax in the Canary Islands has been effectively eliminated for most beneficiaries. A 99.9% reduction applies to Group I, II, and III heirs, including spouses, children, grandchildren, parents, siblings, nieces, and nephews. This means that close family members face little to no tax liability on inheritances. For non-qualifying beneficiaries or high-value estates, consulting a tax professional is advisable to explore additional legal ways to minimize liabilities.

What is the inheritance tax in Tenerife?

Inheritance tax in Tenerife is calculated on the remaining balance after any applicable tax-free allowances are applied. The rates are:

1. Up to €7,993: 7.65%
2. €7,993–€15,980: 9.35%
3. €15,980–€23,968: 10.2%

Further brackets apply for higher amounts. However, with a 99.9% tax rebate introduced in September 2023, most close relatives (e.g., spouses, children, and siblings) face little to no tax liability. For non-qualifying beneficiaries, consulting a local tax expert is advised.