Inheritance tax issues for British expatriates in Spain

With 75,000 UK pensioners currently living in Spain, the subject of Inheritance tax for British expatriates is one that needs to be given careful consideration, says Bank of Scotland International.

If you have, or are considering, retiring permanently to Spain it is vital to consider the implications of Spanish inheritance tax and law that applies in Spain, and assess how this may affect your future heirs and the value of your estate.

Many British expatriates who have moved to Spain believe that, upon their death, their assets would pass automatically to their spouse tax-free, or be disposed of in accordance with their wishes as outlined in their will. Another assumption many people make is that they will automatically avoid the issue of inheritance tax if they are living overseas. However, this is not the case.

Confusingly, Spanish law dictates that, with regards to British property owners, British law should be applied in the event of death. However, British law states that if you are UK domiciled you are subject to inheritance tax on your worldwide assets.

As a general rule, if you are living overseas, the key factor behind inheritance tax is domicile, rather than residence. Your country of domicile is determined by where you were born and where your father was born.

The only way that you can lose UK domicile is to severe all of your ties with the UK and dispose of all of your UK assets. You cannot, however, lose your UK domicile until you have lived away from the UK for at least three years and even then you need to convince HM Revenue and Customers (HMRC) that you have acquired a new domicile with no intention of returning home. Another point to note is that if you lose UK domicile you need to acquire a new domicile in Spain.

Once you are domiciled in Spain, you will be subjected to Spanish inheritance tax on all of your assets. Under Spanish law, if a property is owned in joint names and one of the spouses was to die, the surviving spouse would inherit the remaining spouse's 50% share (this is also true of UK law.) The surviving spouse would be subjected to inheritance tax upon the other half of the property that they have inherited. Inheritance tax is Spain is charged at 7.65% to 34% upon a progressive basis. The 7.65% rate starts from €7,993.46 and 34% is triggered on amounts over €79,755.08.

This is different to the system in the UK in that if assets pass to the surviving spouse, who is also UK domiciled for inheritance tax purposes, there would be no charge to inheritance tax as this would be an exempt transfer. The tax in Spain must be paid within six months of the death (this is also true where UK inheritance tax is to be paid) but the property cannot be sold, or have the ownership details changed until the tax has been paid.

The important factor to note is that where there is both UK and Spanish liability to inheritance tax, one can be offset against the other. It is however, advisable to have a working structure and adequate financial arrangements in place.

Consequently, many solicitors advise British expatriates to write a will under Spanish law, stating that they wish to have their assets disposed of according to Spanish national law.

If UK domicile is still present, then British expatriates will still have to pay UK inheritance tax upon all of their assets at a rate of 40% on estates over £285,000.

In this respect, anyone buying property in Spain should seek qualified and independent legal and financial advice.

Tony Wilcox, Managing Director at Bank of Scotland International, said: "If you are planning to leave the UK to live temporarily or permanently overseas, you need to get expert tax and financial advice and have the right products and services in place."