Brits in Spain could face IHT Pain

March 7th, 2007

An estimated 75,000 UK pensioners currently live permanently in Spain and Bank of Scotland International is warning them of the Inheritance Tax implications of living abroad.

Some will have given up their UK domicile and will be subject to Spanish inheritance tax on all assets. Under Spanish law, if a property is owned in joint names and one partner dies, the surviving spouse would inherit the deceased person’s 50% share – as in the UK where a property is held as joint tenants.

But for a Spanish domiciled resident, the surviving spouse would be subject to Spanish Inheritance Tax upon the half of the property that they have inherited. Inheritance Tax in 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 from the system in the UK where if assets pass to the surviving spouse, who is also UK domiciled for Inheritance Tax purposes, there would be no tax to pay as transfers between husband and wife are exempt from IHT.

The tax in Spain must be paid within six months of death but the property cannot be sold, or have the ownership details changed until the tax has been paid.

Bank of Scotland International points out that 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 not be liable for Inheritance Tax if they are living overseas. This is not the case. A person can be resident abroad but will generally still be domiciled in the UK and will be liable for IHT on their worldwide assets.

Spanish law dictates that, with regards to British property owners, British law should be applied in the event of death. 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 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 that you have acquired a new domicile with no intention of returning home.

To avoid any complications, many solicitors advise British expatriates to write a Spanish Will setting out how they wish to have their assets disposed of according to Spanish national law. For the majority who will still be UK domiciled, they will still have to pay UK inheritance tax upon all of their assets at a rate of 40% on estates over £285,000.

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