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If you are a British expat living in Spain and you suddenly receive an inheritance from a loved one back home, what happens? Do you pay UK inheritance tax (IHT), Spanish IHT or both?
What if your loved one (a British citizen) dies whilst living in Spain and they owned a property there? If you are a beneficiary, or an executor of their will, you need to know how the tax works.
In this guide, our financial planners offer an overview of inheritance tax (IHT) in 2023 for British expats living in (or with interests in) Murcia, Valencia and other parts of Spain.
We hope this content is helpful. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
IHT in the UK: an overview
First of all, it helps to know how IHT normally works for British and Spanish citizens residing in their respective countries.
For the UK, IHT is typically levied at 40% on the value of a deceased person’s “estate” (e.g. property, possessions and investments) once it exceeds £325,000.
However, various tax rules can enable an individual to “extend” their IHT-free estate. For instance, if you leave your family home to direct descendants (e.g. children), then the “residence nil rate band” can add £175,000 to your IHT-free allowance, totalling £500,000.
If you are married or in a civil partnership, then your own estate can pass to your partner without IHT along with all of your unused IHT allowance. In theory, therefore, a couple could leave a combined £1m estate to their children when they both die.
How IHT works in Spain
In Spain, IHT is also known as succession tax (impuesto de sucesiones y donaciones or ISD). The law, unfortunately for expats, is more complicated than in the UK. So strap yourself in!
Before we commence, bear in mind that whilst national rules apply to IHT in Spain, the specific rules can also vary by autonomous region – in some cases, quite significantly. So it will not be possible to cover all of the intricacies in this one post.
For our clients who mostly reside in Murcia, Valencia and Andalusia, the Spanish Civil Code is more directly applied. For a Spanish citizen based in these places, forced heirship rules apply.
This means, for instance, that the deceased’s spouse keeps 50% of all jointly-owned property. The rest goes towards the estate, typically divided into three parts:
- 33% to surviving children
- 33% for surviving children, but the deceased can decide how to distribute between them.
- 33% for the deceased to distribute freely.
However, under EU law, when writing a Spanish Will, expat clients can request that the laws of their country of origin are applied. We ensure our clients are aware of the option to request that UK law applies to their Spanish Will. This avoids the issue of forced heirship and allows you to nominate your chosen beneficiaries.
Unlike the UK (where the deceased’s estate pays IHT), under Spanish law, the recipient of an inheritance must pay IHT depending on the amount received. There are 16 different tax bands, with rates ranging from 7.65% on inheritances valued at under €7,993, to 34% on values over €797,555.
Spain, like the UK, also offers a range of IHT reliefs depending on the relationship between the deceased and the recipient. But unlike the UK, Spain takes into account the existing wealth of a beneficiary. Those with more assets will be subject to greater taxation.
How UK expats can plan for IHT
You now have an idea of how the UK and Spain generally deal with IHT. Yet you will probably still be scratching your head about how this applies to a British expat in practice!
The first thing to mention is that a UK expat’s assets are not generally subject to Spanish IHT if they are located outside of Spain – and if the recipient is not a resident in Spain.
For instance, suppose you reside in Spain and you receive an income from a UK pension pot. Whilst you are alive, your pension will be taxed as a regular income. When you die, you leave the pot to your children who live in the UK.
This potentially avoids Spanish IHT on the pension. It can also avoid IHT in the UK since the UK does not count pension pots as part of a deceased person’s estate.
However, if you own any assets in Spain and/or you have beneficiaries there (e.g. a spouse or children), then IHT planning can get more complicated.
Let us suppose that a British expat has retired to Spain and bought a property there. If she dies whilst a resident in Spain, her estate may be subject to UK IHT, while her beneficiaries may be subject to the Spanish ISD regime.
This is because British expats are subject to UK IHT on their worldwide assets unless they are deemed to be “non-domiciled”. Naturally, Spain would also view any property located in its territory as subject to Spanish IHT.
While this is outside the scope of the current double taxation agreement (as UK IHT applies to the estate and Spanish ISD applies to individual beneficiaries), there is a long-standing agreement that double tax will not apply in this scenario. Typically, tax paid in Spain is taken into account in the UK if levied on the same asset and vice versa.
It is important to plan ahead using professional advice if you want to live, work or retire in Spain as a British expat. If you already reside in Spain, there is still the opportunity to optimise your financial plan with the help of a financial adviser.
As we close, we want to stress the importance of having a will as a UK expat. Without one, you risk dying “intestate”, which typically triggers a lengthy and cumbersome process.
Given that Spanish law requires an inheritance to be processed within 6 months, this could create problems for your loved ones.
Conclusion & invitation
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407