kevinbeddow

Hi
I understand the inheritance tax changed in Jan 07 to 1% for spanish residance,could someone tell me if that also goes for non residence aswell?
Many Thanks
Kevin

expatadvisor

I would need to check this out as legislation is being changed at this time but the situation is more complicated than you say. Alot depends upon the residency status of the beneficiaries who may inherit your property.

The odd situation arises that at this time you can be liable for Spanish Inheritance tax on your property (it is actually the beneficiaries wo are liable of course in Spain on the asset they have inherited) and also liable to UK based Inheritance tax (IHT) on world wide assets. Thus the same asset can be effectively taxed twice. This contrasts to taxed personal income wher tax paid in another country can be offset.

The UK Inheritance tax system is consdierably more onerous than Spanish IHT, and more complicated than ever due to recent Inland Revenue ongoing reviews. The worrying point of UK IHT is that even if you permanently leve the UK to live abroad on the basis that you have a bank account left in the UK or receive say a pension here then you are still regarded as being domiciled in the UK and thus liable to UK IHT on your estate. The closer ties now between the Uk and Spanish tax authorities and transfer of information is apparent, non more so than recent work of UK tax inspectors in Spain in certain tax offices ( which has been so low key - but my information came from a tax Inspector in Centre 1 - one of the main centres now dealing with Non residency compliance) !!

kevinbeddow

So if i was the beneficary of a property abroad how would I get around not paying the IHt from the uk?

Do i become Democile or be a resident in spain,or do i register in the camon isles?

Many Thanks

expatadvisor

This is where correct IHT planning comes into there own in the UK. The use of trusts for certain assets can reduce or even negate IHT liabilities. If you are the potential beneficiary of a property then IHT planning is really out of your hands as you are currently not the owner and where your domicile of residence is, is totally irrelevent if the current owners are UK based. The IHT liability will be on the total value of the current owners - UK assets plus overseas assets. I make the presumption here that the current owners are UK domiciled.

kevinbeddow

Yes the owners are still in uk,we are trying to reduce taxes and thought that with spain only being 1% we would be better moving to spain to avoid a hefty tax bill?

Fred James

I would be interested in the source of your information.

The rates of IHT start at 7.65% and these are applied nationally. I am not aware of any proposed changes to these rates.

What is happening is that many autonomous regions are changing the rules about who has to pay IHT. In some cases you only pay the tax on 1% of the inheritance but there are many conditions attached to this reduction. This may be what you are referring to.

In some regions the basic allowance against IHT has been increased from around 16000 to over 100000 euros - again with conditions.

It is the general intention to change the law so that the average family will not be affected by IHT and this is now happening in many areas. There is no suggestion of a blanket reduction for large estates or inheritance by non family members.

It is a very complex subject and the rules are changing all the time. If you are seriously considering moving just to minimise your IHT liabilities then you must get proper professional advice.

EsuriJohn

Hi expatadvisor,

I recently asked for help in this tricky area but no one could give a definitive answer. My situation is this. My wife and I are UK domiciled (no chance to change this since we both receive Government Pensions). We own property in England as Tenants in Common with English wills written to provide 2 year Nil Rate Band Discretionary Trusts. We also own property in Spain shared equally with our three children and are about to write Spanish wills to cover our Spanish Estate. If we make mirror image wills to leave our estate in Spain divided between the children with a usufruct for the survivor we will have minimised our exposure to IHT in each domain.

However there is conflicting advice as to how the HMR&C will treat the usufruct, on the one hand it is believed that the usufruct will reduce the value of the Spanish estate just as a lifetime tenancy would in UK perhaps using the Spanish Hacienda tables of reduction in value. The contrary view is that it would be regarded as a gift with reservations and the whole value of the share of the Spanish estate would be added back to the second estate therefor negating the usufruct as an IHT planning tool.

Any views?

Regards,

John.

kevinbeddow

My info was from spanish solicitor in Mallorca?

Mitzyboy

I'm assuming though thats for resident beneficiaries ... If my wife and I peg it together then my daughter who lives in the UK is stuffed, right, even if she does keep the home for ten years after our demise.

EsuriJohn

Yes!

expatadvisor

I just wish answers to questions posted here were straight forward, however they are not. This follows a test case in the last fortnight (look up Phizackereley) in which the revenue successfully argued against a case involving nil rate band trusts for IHT planning, taking in tenants in common etc. There are spin offs of this ruling which involve potential capital gains tax. These trusts need to be reviewed with your solicitors/ advisors.

I am not saying such trusts are now nul and void but anyone who has such a trust needs to have it reviewed, the general view appears that this was a one off case.

Off the record at this time I am very suspect of all Inland Revenue activity, notably test cases re Non residency which the revenue have won, closer ties with european tax offices and data transfer between countries ec.

EsuriJohn

Hi Expatadvisor,

No chance of Phizackereley effecting us she always matched my earnings pound for pound but I am sure they will find another peg to hang us on.

Thats why we chose a 2 year discretion gives the ones left the chance to vary things if new problems have been presented by HMR&C and we try to keep up to date with changes so that we can make changes ourselves before the big day!

Don't know where to try next for a better definition on "usufruct" though.

Regards,

John.
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kevinbeddow

Hi Expatadvisor
Many thanks for your time and advise,May I ask,If I was non resident in uk and spain (mallorca)then became the benificary of a property in Mallorca what inheratance tax would i pay?

Mitzyboy

Depends on the value of the property .... anything between 7.65% and 34% on the 2006 figures, and you can't sell the property to raise the funds.

expatadvisor

I do like the use of the word usufruct. I also agree that the Inland Revenue are trying all angles to raise additional revenue. Little wonder therefore why more and more people are leaving the UK, severing their ties completely, with the UK and moving permanently abroad.