Let’s face it, thinking about tax is not really a favourite pastime for the majority of us and because inheritance tax comes hand in hand with thoughts about either our death or that of our spouse it is one of the least talked about or thought about forms of taxation. And yet…inheritance tax is also one of the most unjust forms of taxation and one that needs to be understood so as to be legally avoided as far as possible!
Now, the subject of inheritance tax for expats living in Spain comes with a whole bunch of additional concerns and questions and so if you’re living in Spain or thinking about retiring to Spain this article covers what you need to know succinctly and comprehensively.
No matter where in the world you live, if you retain your UK domicile you will be subject to UK inheritance tax on your worldwide assets. Unlike your residence status which can easily be changed, domicile is far harder to shake off! Domicile is basically determined by where in the world you were born and where in the world your father was born – okay, so it’s not always that simple for all of us but if you and your father were born and raised in the UK you are of British domicile.
Even if you move to Spain to live permanently, chances are you will not be considered domiciled in Spain. If you really want to change your domicile (and in the case of Spain it won’t benefit you from a taxation perspective) you will need to dispose of all assets in the UK and sever all ties with Britain, seek to establish domicile in Spain and then contact HM Revenue and Customs in the UK and make sure they acknowledge this and tell you officially that you are no longer domiciled in Britain.
Under the assumption that you are highly unlikely to go to such lengths when it will provide you will no known benefit let’s assume you’re living in Spain and you have a home there which is jointly in your name and that of your spouse. Under Spanish law, upon your death because you are a British citizen British law is applied to your assets….this goes along with what I said earlier, i.e., if you’re British domiciled the UK tax man wants your assets when it comes to IHT!
Fortunately for your spouse, if you die your half of the property will pass to them inheritance tax free. If you had Spanish domicile however your spouse would actually have to pay tax on inheriting your half of the house!
If both partners die and the Spanish property is willed to a surviving child, they will become liable to pay UK inheritance tax on your estate at a flat fat tax rate of 40% on anything over and above the current GBP 285,000 threshold (this threshold changes annually and is correct at the time of writing).
So, when it comes to discussing inheritance tax for expats living in Spain the first thing most people are advised to do is to write a will under Spanish law stating that they want their Spanish estate dealt with under Spanish national law which you will remember means it is actually dealt with under British law!
The next thing to do is speak to a taxation or financial adviser about your options when it comes to lessening your estate’s IHT burden – the options available vary depending on your unique individual circumstances and so you need personalised advice.
