Pensioners are being warned retiring abroad to countries such as Spain will not necessarily mean they will avoid the UK's Inheritance Tax regime, according to Bank of Scotland International.
With around 75,000 UK pensioners currently living in Spain, the firm warns the subject of IHT should be given more consideration, as it says many British expatriates believe their assets will automatically be passed on to their spouse tax-free, or be disposed of in accordance with their wishes as outlined in their will.
While many also assume they will automatically avoid the issue of IHT if they are living overseas, Bank of Scotland International says this is not the case as Spanish law dictates, with regards to British property owners, British law should be applied in the event of death.
However, the company says as British law states if you are UK-domiciled you are subject to inheritance tax on your worldwide assets, and this means individuals could still be liable for a 40% tax charge on their assets above the IHT threshold, currently at £285,000.
It points out this is because, as a general rule, if you are living overseas the key factor behind inheritance tax is domicile, rather than residence, and your country of domicile is determined by where you were born and where your father was born.
As a result, the firm says the only way to lose UK domicile is to sever all ties with the UK and dispose of all UK assets, although it warns individuals still need to have lived away from the UK for at least three years and even then they have to convince HM Revenue & Customs (HMRC) they have acquired a new domicile with no intention of returning home.
Using Spain as an example, Bank of Scotland International says once individuals acheive a new domicile in Spain they will be subjected to Spanish IHT on all of their assets, which means 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, in the same way as UK law.
However, the surviving spouse would be subjected to IHT on the half of the property which is inherited, unlike the UK where inheritance by a spouse is exempt, although Spanish IHT is charged at a lower rate than the UK’s 40%, with the amount ranging between 7.65% to 34%, with the 7.65% rate starting from €7,993.46 while the 34% is triggered on amounts over €79,755.08.
As a result, the firm points out, many solicitors advise British expatriates to write a will under Spanish law stating they wish to have their assets disposed of according to Spanish national law and not that of the UK.
Tony Wilcox, managing director at Bank of Scotland International, warns: “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.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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