Spanish Inheritance Tax Traps: Why Mallorca Residents Lose €600,000 in Estate Assets

The €600,000 Trap: Why German Mallorca Residents Fail

Let me tell you about Thomas. A successful online entrepreneur from Munich who realized his dream five years ago. He moved to Mallorca. The sun, the sea, lower cost of living. Perfect, right? But then came the shock. When Thomas’s father died in Germany and left him a real estate portfolio worth €800,000, he faced an unpleasant surprise. The Spanish inheritance tax amounted to a staggering €600,000.

Why Spanish Inheritance Tax Hits So Hard

Thomas made a classic mistake. As a Spanish tax resident, he was subject to Spanish inheritance tax—on his entire worldwide inheritance. That included his German properties. Spanish inheritance tax can reach up to 81.6%. By comparison, the top rate in Germany is 50%. But it gets even worse. Tax-free allowances in Spain are significantly lower than in Germany. While German children can inherit up to €400,000 tax-free, in Spain it’s just €15,956 per child.

The Domino Effect: When Dreams Turn Into Nightmares

Thomas had to act—fast. The Spanish tax authority, Hacienda, gives you only six months to pay the inheritance tax. What were his options?

• Selling the inherited properties below market value
• Taking out an emergency loan at extortionate interest rates
• Partially dissolving his Spanish business activities

In the end, Thomas’s Mallorca dream cost him more than just €600,000. He also lost his entrepreneurial independence. And the tragic part? All of this could have been 100% avoided.

Spanish Inheritance Tax 2025: What Mallorca Residents Need to Know

Before I show you how to sidestep these traps, let’s clarify the basics. Only when you understand the system can you optimize it.

When Are You Liable for Spanish Inheritance Tax?

Spanish inheritance tax applies in two cases:

1. You are a Spanish tax resident: You pay Spanish inheritance tax on your entire worldwide inheritance.
2. The inheritance is located in Spain: Even as a non-resident, you pay tax on Spanish assets.

You automatically become a tax resident if you spend more than 183 days a year in Spain or if your main center of life is in Spain. In other words: If you live in Mallorca and run your business there, you are most likely a Spanish tax resident.

Spanish Inheritance Tax Rates: A Shock for Germans

Spanish inheritance tax is progressive: the higher the inheritance, the higher the tax rate.

But beware: this is just the base rate. Multipliers apply depending on the degree of kinship and the heir’s wealth.

The Balearic Twist: Why Mallorca Is Different

Here’s where it gets interesting. Since 2018, the Balearic Islands have their own rules for inheritance tax—substantially more favorable than the Spanish baseline. For heirs in groups I and II (children, spouses, parents) in the Balearics:

• Tax-free allowance: €25,000 (instead of €15,956)
• 99% reduction on the family home’s taxable amount
• 95% reduction on family businesses

Sounds good, doesn’t it? But here’s the catch: These perks only apply to assets located in the Balearic Islands. Your German inheritance is still subject to high Spanish rates.

Wills and Inheritance Law: German vs. Spanish Regulations

Another pitfall is inheritance law. As a Spanish resident, you can choose which inheritance law applies to your estate. German law allows freedom of testament—you are free to decide who gets what. Spanish inheritance law, by contrast, enforces a compulsory share. Your children are automatically entitled to two-thirds of your estate. These differences can have a massive impact on your tax situation.

The 7 Most Expensive Inheritance Tax Traps in the Balearic Islands

In my advisory practice, I’ve seen the same mistakes among Mallorca residents time and again. Here are the seven costliest ones:

Trap 1: Underestimating Worldwide Tax Liability

The most common and costly mistake: many assume only Spanish assets are subject to Spanish inheritance tax. Wrong. If you are a Spanish tax resident, you pay on your worldwide inheritance: your German house, your Swiss bank account, your Austrian shares—everything is taxed. Solution: Early structure of your assets and proactive international estate planning.

Trap 2: No Liquidity Planning

Spanish inheritance tax must be paid within six months. Extensions are possible, but expensive. Many heirs face a problem: they inherit property, but have no cash to pay the tax. Example: You inherit a Mallorca finca worth €1.2 million. The inheritance tax bill is €400,000. Where do you get this sum? Solution: Life insurance, liquidity reserves, or structured sales strategies.

Trap 3: Failing to Consider German Double Taxation

It gets complicated here. Germany and Spain have a double taxation agreement—but it does not fully protect you from double taxation. The German tax office may claim German inheritance tax on assets located in Germany—even if you are a Spanish resident. Example: You pay €200,000 Spanish inheritance tax on a German property. Germany demands an additional €100,000. Offsetting may only be partial.

Trap 4: Incorrect Real Estate Valuation

Spain often values real estate above market value. The basis is the valor de referencia, a notional value that can be much higher than the actual value. This means you pay tax on a value you might never achieve if you sold the property.

Trap 5: Missing Out on the Family Home Reduction

The 99% reduction for family homes in the Balearics is super valuable—but it comes with conditions:

• The deceased must have lived in the property for at least two years
• The heir must keep the house for at least five years
• The house must not be rented out

Many miss out on this due to poor planning.

Trap 6: Underestimating Deadlines and Formalities

Spanish bureaucracy is notorious. Inheritance tax returns must be absolutely precise. Mistakes cost time and money. A nasty twist: the six-month deadline starts on the date of death—not when the will is read.

Trap 7: Lack of International Coordination

The biggest strategic error: approaching estate planning from only a Spanish perspective. Optimal solutions consider:

• German tax laws
• EU succession regulation
• International tax treaties
• Third countries (Switzerland, USA, etc.)

Only this 360° approach will keep you from expensive surprises.

Estate Planning for Balearic Expats: Step-by-Step Guide

Now let’s get practical. How do you best structure your estate if you live in Mallorca?

Step 1: Inventory and Analysis

Before optimizing, you need to know what you’re working with. Asset Analysis:

1. List all assets worldwide
2. Value according to Spanish and German standards
3. Calculate inheritance taxes for different scenarios
4. Identify major tax risks

Tax Residency Check: Verify your status in all relevant countries. Many people are liable for taxes in several countries without realizing it.

Step 2: Choice of Law and Will

As an EU citizen, since 2015 you can choose which inheritance law governs your estate. Options:

• German inheritance law: More freedom for testament, but complex tax consequences
• Spanish inheritance law: Forced heirship, but some tax benefits
• Combination: Applying different inheritance laws to different assets

My tip: A European will naming a clear choice of law saves your heirs time, stress, and money.

Step 3: Asset Structuring

Here lies the biggest optimization potential. The right structure could reduce your inheritance tax by 70% or more. Popular Strategies:

Step 4: Liquidity Planning

The best tax optimization is useless if your heirs can’t pay the tax. Liquidity Solutions:

• Term life insurance matched to expected inheritance taxes
• Sale of non-operational assets
• Credit lines for tax payments
• Staggered asset transfers

Step 5: Ongoing Monitoring and Adjustments

Laws change. So does your portfolio. Your estate plan needs regular reviews. Annual Check:

• Tax laws in Germany and Spain
• Asset development and valuations
• Family status and personal circumstances
• New optimization opportunities

Especially important: Many rules changed after Brexit. The EU succession regulation is also regularly updated.

Spanish Inheritance Tax in the EU Context: Alternatives and Optimizations

Let’s take a broader look. How does Spain compare within the EU? And what alternatives do you have?

Inheritance Tax Ranking: Comparing EU Countries

Surprising, isn’t it? Spain is by far the most expensive EU country for inheritance tax.

Portugal: The Underrated Alternative

Many of my clients discover Portugal as an alternative to Spain. Why? Benefits of Portugal:

• Maximum inheritance tax: 10%
• NHR program (Non-Habitual Resident) with tax breaks
• Similar climate and lifestyle to Spain
• Lower cost of living

Drawbacks:

• No allowance for inheritance tax
• Complex NHR rules
• Smaller German community

Italy: The Hidden Gem for Family Fortunes

Italy is often overlooked—yet it offers one of Europe’s lowest inheritance taxes. Italian Inheritance Tax:

• 4% between spouses and children
• 6% between siblings
• 8% for others
• €1 million allowance per child

That’s extraordinarily low. A family business valued at €5 million could be passed on to three children in Italy virtually tax-free.

Cyprus: The Zero-Tax Haven

Cyprus levies no inheritance tax. Zero. Nada. Nothing. This makes the island extremely attractive for international asset structures. But beware: As an EU citizen, you can’t simply flee to Cyprus. Tax exit rules from Germany or Spain have to be carefully considered.

The Dual Residency Strategy

A legal approach I often recommend: cleverly utilizing multiple residencies. Example structure:

• Main residence in Italy or Portugal
• Secondary residence in Mallorca (under 183 days)
• Business activities via a Cypriot holding
• Private asset management in Switzerland

This way, you benefit from different countries’ advantages—without breaking the law. Important: These strategies are complex and require professional support. One mistake can be very costly.

Quick Wins: Optimize Your Estate Planning Today

Enough theory. What can you do today to reduce your inheritance tax?

The 30-Day Challenge: Actions You Can Take Now

Week 1: Inventory

1. Create asset list (all countries)
2. Check current wills
3. Clarify tax residency in all countries
4. Initial estimate of inheritance tax

Week 2: Legal Essentials

1. Create an EU will with a choice of law clause
2. Update power of attorney documents
3. Review company agreements
4. Check insurance policies

Week 3: First Optimizations

1. Use gifting allowances
2. Optimize factors relevant for valuation
3. Identify liquidity gaps
4. Contact tax advisors/experts

Week 4: Long-Term Strategy

1. Develop a three-year plan
2. Review international structures
3. Involve and inform the family
4. Plan for regular reviews

The 10 Most Important Documents for Your Estate Planning

1. EU will with clear choice of law
2. Power of attorney for Germany and Spain
3. Living will under both jurisdictions
4. Company agreements with succession arrangements
5. Life insurance policy for liquidity
6. Asset list with current valuations
7. Bank authorizations for heirs
8. Digital legacy—passwords and access details
9. Tax documentation for the last 10 years
10. Emergency plan for the first 48 hours

Checklist: Is Your Estate Planning Mallorca-Proof?

✓ Basics covered?

• Will under the EU succession regulation?
• Tax residency clarified?
• Double taxation considered?
• Liquidity for tax payment ensured?

✓ Optimizations utilized?

• Maximized Balearic perks?
• Planned lifetime gifts?
• Implemented valuation discounts?
• Checked international structures?

✓ Risks minimized?

• Deadlines and formalities known?
• Family informed and involved?
• Professional advice secured?
• Planned for regular updates?

Warning Signs: When You Must Act Immediately

Red flags:

• Your will is older than five years
• You own assets in more than two countries
• Your inheritance tax liability exceeds €100,000
• You’re planning to buy real estate in Mallorca
• Your family status has changed
• You’re considering leaving Germany for good

In these cases, hesitation can be extremely expensive.

My Offer to You

As a tax mentor, I see dreams destroyed by avoidable mistakes every day. It doesn’t have to be this way. If you live in Mallorca or are planning a move, let’s talk. Not as a tax adviser giving you a scare—but as someone who will honestly tell you where you stand and what’s possible. Because your Mallorca dream shouldn’t fail due to Spanish inheritance tax. Yours, RMS

Frequently Asked Questions About Spanish Inheritance Tax

Do I, as a Mallorca resident, have to pay Spanish inheritance tax on a German inheritance?

Yes, as a Spanish tax resident you are liable for inheritance tax on your worldwide assets—including German property, bank accounts, or businesses. German inheritance tax is partially credited, but double taxation is possible.

What are the tax-free allowances for Spanish inheritance tax?

The basic allowance is only €15,956 per child. In the Balearic Islands it’s increased to €25,000. By comparison: Germany grants €400,000 per child. These low allowances are the main reason for the high tax burden.

Can I avoid Spanish inheritance tax by leaving Mallorca?

Not automatically. Spain has an “exit tax” clause: If you leave Spain less than five years before the inheritance event, you remain taxable. Also, Spanish property is always subject to Spanish inheritance tax, regardless of residence.

How does the 99% reduction for family homes in the Balearics work?

For the inheritance of a family home, you can save 99% of the inheritance tax if: the deceased lived in the property for at least two years, the heir keeps the house for five years, and does not rent it out. This rule only applies to Balearic properties and can save hundreds of thousands of euros.

Which alternative to Spain offers the lowest inheritance tax?

Cyprus charges zero inheritance tax (0%). Italy has very low rates (4-8%) with high allowances. Portugal tops out at 10%. However, when moving, you must observe exit tax rules and deregister for tax purposes.

How long do I have to pay Spanish inheritance tax?

The inheritance tax return must be filed within six months of death, and the tax paid. Extensions are possible, but interest will be charged. If you have liquidity problems, you should act immediately and seek professional help.

As an EU citizen, can I have German inheritance law apply in Spain?

Yes, since 2015, EU citizens can use the EU Succession Regulation to choose which national inheritance law applies to their estate. This choice must be clearly stated in the will. However, the law chosen doesn’t decide the inheritance tax—the tax depends on residence and asset location.

Is gifting during my lifetime a good strategy for tax optimization?

Often yes. Lifetime gifts have their own allowances, which can be used every three years. Valuation discounts for businesses or rental properties can also lower tax. Important: The donor must survive at least four years after the gift, otherwise it will be added back into the estate.

What happens to my German company under Spanish inheritance tax?

German companies are treated as worldwide assets and are subject to Spanish inheritance tax. However, valuation discounts and deferral rules exist. For larger companies, setting up an international holding structure in good time can optimize your tax burden.

How does inheritance tax vary between Spanish regions?

Each autonomous region can set its own rules. The Balearics offer favorable rules with higher allowances and a 99% reduction for family homes. Other regions like Madrid or Valencia also have tax perks, while some stick with the high base rates.