The Inheritance Tax implications for Brits living in Spain

If you are British and a Spanish resident, your estate may be tested against UK Inheritance Tax rules when you pass away. UK Inheritance Tax is one of the most aggressive taxes, so it is imperative you understand who is affected and how it works.

Inheritance tax is often referred to as being an “inertia tax” as with good planning it can generally be avoided completely for Brits living in Spain.

Who is liable for a large IHT bill?

The size of your estate will dictate whether or not you there is any tax to pay when you pass away. If your estate is over the tax free threshold, it may cost your beneficiaries thousands when you die. Fortunately, with good financial planning, it is possible to legally avoid Inheritance Tax, either in part or in full.

In the 2018/19 tax year, HMRC received £5.4 billion in receipts from Inheritance Tax. This figure is large, but if it wasn’t for tax efficient planning, the figure would likely be £50 billion+

This blog covers:

  • What is Inheritance Tax?
  • What is meant by ‘estate’
  • What is the difference between residency and domicile?
  • Do I have to pay IHT if I live and die outside of the UK?
  • How can IHT be legally avoided?

What is Inheritance Tax?

Inheritance Tax is a death tax on the estate of someone who’s passed away with a UK domicile.

What is an ‘estate’?

An estate is everything comprising the net worth of an individual, including all land and real estate, possessions, financial securities, cash, and other assets that the individual owns or has a controlling interest in.

How much tax is due?

There is normally no tax to pay if either:

  • The value of the deceased’s estate is below the £325,000 threshold
  • You leave everything over the £325,000 threshold to your spouse, civil partner a charity or a community amateur sports club.

Your estate will, however, owe tax at 40% on anything above the £325,000 threshold when you die (or 36% if you leave at least 10% of the net value to a charity in your will) – excluding the ‘main residence’ allowance (see below).

Residency & Domicile

The difference between residency and domicile is key to understanding your potential Inheritance Tax liability. Whether or not you have to pay Inheritance Tax depends on your deemed domicile, not your residency.

Therefore, if you are of UK domicile is important to note, that simply living outside of the UK does not automatically absolve you from an Inheritance Tax liability.

Domicile explained

Your country of domicile is the country in which you have a permanent home or a substantial connection. Upon birth you are automatically assigned the domicile of your father, this is known as your domicile of origin.

You will retain your domicile forever unless you obtain a new domicile. Simply moving overseas is often not enough to change your domicile. In most cases, you will need to take direct action to change your domicile.

If you are unsure about your domicile status click here to be put in touch with an expert.

Do I have to pay IHT if I live and die whilst living in Spain?

If you are of UK domicile, living in Spain will not absolve you from Inheritance Tax, your estate will be tested against Inheritance tax upon your death.

Unfortunately, many people are unaware of how this law works. There is a common misconception among the expatriate community, that by simply living in Spain and becoming a tax-resident all Inheritance Tax liability is removed. This is not the case.

How can Inheritance Tax be legally avoided?

There are a collection of ways in which people can avoid Inheritance Tax legally, by structuring their assets in a tax efficient manner.

deVere Spain specialises in helping our clients minimise their eventual Inheritance Tax liability. This advice is given on a case-by-case basis. If you would like to learn more about any of the issues raised within this blog click on the link below to request a complimentary consultation with an expert.

About us

deVere Insights is a proud component of the deVere Group. Our company has always prided itself on leading the way in the sphere of wealth management. This website is in place to share information and expertise.