| UK Inheritance Tax |
| UK expatriates, because they almost certainly retain their UK domicile, retain their liability to UK inheritance tax (IHT). Tax is assessed on the total world- wide wealth, the 'estate', of the deceased. The first £242,000 is exempt -this is commonly referred to as the "nil-rate band"- a single rate of 40% being applied to the excess. Importantly, no tax is payable on transfers between spouses providing that the surviving spouse is also UK domiciled. Where the deceased is not domiciled in the UK,IHT is assessed on UK sited assets. |
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| Domicile |
There are various ways in which you can acquire UK domicile but for most UK expatriates it will have been acquired at birth a "domicile of origin". Just because you are no longer resident for tax purposes in the UK does not mean you are no longer domiciled in the UK far from it. Whilst it is possible to change your domicile and acquire a domicile in another country, a "domicile of choice", this is not easy.
To cut a very long story very short, you will have to convince the UK authorities that you have genuinely abandoned the UK; that you no longer consider the UK to be your natural home; that you have severed all links with the UK and that you intend to remain permanently in your chosen country. This is likely to be difficult to prove, particularly, to a suspicious taxman, as much has to do with your emotions rather than fact. It is easy to prove that you have severed your links with the UK e.g. sold your house, resigned from the golf club etc, but proving your emotions, particularly when you're dead, is going to be difficult. |
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| The Reality |
| Many couples say that Spain is now there permanent home and they will stay for the rest of their lives. However, most admit that they would probably return home if one or other became ill or one of them died. Such statements hardly add substance to a claim of having forsaken the UK. The reality is that the vast majority of UK expatriates retain their UK domicile and, therefore, remain liable to UK IHT. |
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| Spanish Inheritance Tax |
| This is an altogether different story. Residents, including expatriates resident for tax purposes in Spain, are liable to Spanish IHT on any inheritance they receive irrespective of the country in which the inheritance is situated. Those not resident in Spain are liable to IHT in Spain on assets they inherit which are physically located in Spain e.g. a holiday home. Tax is assessed separately on each individual and depends on the relationship to the deceased; pre-existing wealth and, if under 21, The tax rates are progressive, they increase with the amount inherited. Here's the shock bit - there is no spouse exemption. In Spain, tax is payable on transfers between spouses and allowances are not generous, just £10,000. It could be said that UK IHT is not our problem, it's the children's problem,they are the one's who will be paying the tax. Spanish IHT is our problem - it's the surviving spouse who has to pay. |
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| An Example |
Ben and Eileen Dover are resident in Spain and remain domiciled in the UK. In their Wills they leave everything to each other and then in equal shares to their two children who live in the UK. A not untypical scenario. Their assets, which they hold in their joint names, are:
Spain
House £224,000
Bank Account £15,000
Ex-Spain
Investments £100,000
Total £340,000
If Ben were to die today, whilst there will be no UK IHT to pay due to the Husband/wife exemption, Eileen will have to pay tax in Spain on an inheritance of £170,000 she will have to pay more than £27,000 more than a quarter of their savings. On Eileen's death, her children will have to pay tax in Spain on the Spanish sited assets they inherit. |
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| Good News, Bad News |
Good news - the children will be able to set off the IHT paid in Spain on their mother's death against the tax that they will then have to pay in the UK.
Bad news - as no tax is payable in the UK when Ben dies, there is nothing against which the tax that Eileen has to pay in Spain can be set off - and it cannot be carried forward. The tax paid by Eileen is lost. |
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| The Family Home |
| I have ignored one provision of Spanish IHT legislation whereby, subject to certain conditions the value of the family home can be reduced by 95% subject to a maximum reduction 20,400,000 pesetas (122,606.47 Euro / 80,000 pounds sterling). However, any tax so saved is 'clawed back', with interest, if the house is sold within 10 years. Since many surviving spouses, if ) not the majority, return to the UK following the death of their partners, this 95% reduction has little meaning in practice. |
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| Tax Evasion |
| Many people confuse 'tax planing' with 'tax evasion' or, more kindly, 'non-declaration'. This can be foolhardy and, probably, expensive - recent amendments to the Spanish tax system have released more tax inspectors from their desks to carry out inspections - to say nothing of the disclosure provisions which are creeping up. Supposing Eileen and Ben had declared the £100,000 of investments held outside Spain, where then did Eileen find the money - the £27,000 - to pay her Spanish IHT bill? Answers on a postcard, please. Someone is now thinking, they hadn't declared the 100,000, Eileen wouldn't declare it for IHT purposes either. Fair point - but even without the £100,000, Eileen's tax bill is still over £16,000! |
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| Tax Planning |
It is clearly vital that the tax payable in Spain by Eileen when Ben dies (or vice versa) should be reduced to an absolute minimum - particularly so if Ben's death would cause a reduction in her income as well as a reduction of her capital. Fortunately, there are ways of reducing your liability to IHT both in Spain and the UK. However, tax planning is not a job for people who do not fully understand the Spanish tax system or the UK tax system.
With the benefit of the practical experience of our teams in our offices in both Gibraltar and Sotogrande, BDO Fidecs does understand - this is the advantage we hold over most other advisers. Most of our senior staff are, themselves, UK expatriates so we do appreciate the problems first hand. If you would like to know more, without obligation, contact Paul Nicholls - 952 53 17 29, 952 52 06 62 or 956 79 61 48 or myself in our Gibraltar office 956 74 26 86. |
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