Thanks everyone for your replies.

So the best bet seems to be that you become tax resident and both hopefully survive for a further 5 years in say, Valencia...........therein your Spanish inheritance tax will be minimal.

What happens if either of you don't survive the necessary 5 years of tax residency..........???

Any ideas ?

Partially correct.

Firstly the 7% transfer tax doesn't apply to changes of ownership due to inheritance.

The basic state rules on IHT allow the surviving spouse 95% relief on IHT on the main home of the deceased but there are limitations.

The inheritor must be a spouse, ascendant or descendant or failing that a more remote relative (such as a sibling) who is over 65 and has lived with the deceased for 2 years prior to the death.

The property must be retained by the beneficiary for 10 years following the death but it does not need to remain the main home of the beneficiary during that time - ie. it could be rented out.

If the beneficiary dies within the 10 years the IHT is not clawed back.

The maximum deduction under this rule is €122,606 - any excess is taxed at the appropriate rate.

This rule applies to non resident beneficiaries as well as resident beneficiaries.

There are different rules that apply in certain regions which can be more beneficial than these national rules but they almost always only apply to residents of that region and a 5 year rule on residency is usually applied.

So if one of us dies before the age of 65, all bets are off? or is that just the sibling who must be over 65?

That only applies to relatives - the exemption for the spouse is at any age.

My understanding is that UK IHT is not covered by the double taxation agreement and it is somewhat of a grey area in it's application.

Fred, are you actually saying that if for example you own a property in the UK that you know rent out and a property in Spain which is your main residence the value of the UK property would be subject to Spanish inheritance tax? My hopeful belief is that my UK fixed assets included in my UK Assets Will will be subject solely to UK IHT. Providing the value of these assets is less than the threshold for UK IHT there would be no tax to pay. My Spanish assets covered by my Spanish Assets Will would of course be subject to Spanish IHT.

It's quite simple if you remember that the tax is levied on the recipient not the estate so it is the recipient's tax status that is important.

Spanish assets are subject to tax whether the recipient is resident or not.

Non Spanish assets are not liable for tax if the recipient is non resident but are liable if the recipient is resident.

So, for example, assume that you and your wife are resident in Spain and have a son who is resident in the UK.

If you left your share in the UK assets equally to your wife and son, then she would be liable for Spanish tax on them and your son would not.

If you are considered to still be domiciled in the UK (different from tax residency and more complicated) then your estate (including the Spanish assets) is liable for UK IHT. Of course those rules are very different such as spouse exemption and much higher basic exemptions.

Although the double tax treaty doesn't cover IHT as such I believe there is a mechanism where tax paid in one country can still be offset against tax paid on the same asset in another country.

Thanks Fred - that' the first time I have had an explanation in plain English.
My wife sends her regards as she will now be removed from my UK Will!!

Two questions:

(I'm UK resident trying to help Spanish resident Dad do his estate planning)

1. Does Spain have anything similar to the UK system whereby an individual can "gift" a property to a family member, avoiding IHT so long as the giver continues to live for another seven years?

2. Has anyone tried the mechanism (promoted by one or two law firms) by which the Spanish resident transfers his/her property into an offshore (or UK Ltd) company, that company having other family members (ie the potential inheritors) as co-shareholders? Lets be clear this is not about tax evasion, rather it is about using a different tax than IHT upon the death of the property owner.

Spain has a system where you can gift an asset but IHT becomes due at the time of making the gift - no 7 year exemption in Spain.

Yes, you can avoid tax by setting up a company but the costs can be high - it just depends on the value of the assets and the exposure to IHT which can vary significantly depending on region and the tax residency of the recipients.

There are loads of companies offering this service if you Google it.

Sorry Fred - one final point of clarification please. As far as you understansd would my wife (tax resident in Spain) still benefit from the UK IHT threshold and only be liable to Spanish tax on any excess above this level.

UK tax thresholds and allowances only apply to UK taxes so, no she would only get the Spanish allowances against Spanish IHT which can be as low as €16k.

IMO - no.

You have to understand that they are very different taxes. Spanish succession tax, for your wife, would be payable on all world-wide assets. UK IHT is then payable on UK assets AND possibly on Spanish assets too.

As they are different taxes the double taxation treaty doesn't apply.

Fred mentioned Although the double tax treaty doesn't cover IHT as such I believe there is a mechanism where tax paid in one country can still be offset against tax paid on the same asset in another country. but I have never found an advisor that could substantiate this or who knew about applying for it.

For these reasons, if at all possible, it's best to sever all ties with UK so that you are not considered domiciled there.

Sorry again!!! Perhaps I did not phrase the question correctly.

Wife tax resident in Spain. Spanish assets covered by Spanish Assets Will subject to Spanish Succesion tax less Spanish tax free allowances - understood.

UK assets covered by UK Assets Will subject to Spanish Succession Tax - understood, but would the actual value of the UK Assets the tax was applied to be reduced by the UK IHT threshhold.

I thought I had made that clear. Any UK tax due on UK assets would have the usual UK allowances applied.

It's really simple - they are two entirely different systems and there is no way allowances in one country can be applied to the tax due in another country.

I can only quote from guidance from Blevins Franks:-

"In the absence of a treaty, normal Spanish rules will apply to any gift or inheritance but where any overseas gifts or inheritance tax is actually paid, this overseas tax is deductible against any Spanish tax due on the same transfer. This is a Spanish unilateral rule for gift and succession tax. However, if the overseas tax rate is higher than the Spanish rate the Spanish authorities will, of course, not provide a refund of the difference."