The Spanish property and income release scheme (SPAIRs) reaches the Supreme Court: reverse mortgage voided for investment and inheritance tax avoidance through contractual collusion

Abstract

The SPAIRs Scheme is a contractual arrangement historically marketed in Spanish coastal areas, generally to foreign property owners, with the purpose of enabling such property owners (or their successors) to avoid or significantly reduce Spanish inheritance tax. Specifically, a reverse mortgage was granted, under which part of the loan capital was paid to the property owner and another part was invested in investment funds. The expected return on those funds was intended to be sufficient to cover the mortgage interest and, in addition, to provide supplementary income to the owners. However, following the 2007 financial crisis, the funds failed to achieve the expected performance, with the result that ownership of the properties became threatened by the potential enforcement of the mortgage due to non-payment of interest and other related costs. In England, the courts ruled that there had been no misrepresentation or fraud in the marketing of the product. By contrast, the Spanish Supreme Court has declared all such contracts null and void, applying the doctrine of the causal unity of linked contracts. This paper analyses the structure and marketing of the product, the position taken by the English courts, the reasoning of the Spanish Supreme Court, and considers the possible existence of an immoral cause and its legal implications.