With 75,000 UK pensioners currently living in Spain, the subject of inheritance tax for British expatriates is one that needs to be given careful consideration, according to Bank of Scotland International.
Spanish law dictates that, with regards to British property owners, British law should be applied in the event of death. However, British law states that if you are UK domiciled you are subject to inheritance tax on your worldwide assets.
For those living overseas, the key factor behind inheritance tax is domicile, rather than residence.
The only way that someone can lose UK domicile is to severe all of their ties with the UK and dispose of all of their UK assets. They cannot, however, lose UK domicile until they have lived away from the UK for at least three years, and even then they need to convince HM Revenue and Customers (HMRC) that they have acquired a new domicile with no intention of returning home.
Once you are domiciled in Spain, people be subjected to Spanish inheritance tax on all of their assets. Under Spanish law, 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 (this is also true of UK law.) The surviving spouse would be subjected to inheritance tax upon the other half of the property that they have inherited. Inheritance tax is 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 to the system in the UK in that if assets pass to the surviving spouse, who is also UK domiciled for inheritance tax purposes, there would be no charge to inheritance tax as this would be an exempt transfer. The tax in Spain must be paid within six months of the death (this is also true where UK inheritance tax is to be paid) but the property cannot be sold, or have the ownership details changed until the tax has been paid.
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