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Are British Expats in Spain Caught Between a Rock and a Hard Place when it Comes to Spanish Succession Tax and UK Inheritance Tax? Image

Are British Expats in Spain Caught Between a Rock and a Hard Place when it Comes to Spanish Succession Tax and UK Inheritance Tax?

April 25, 2023

Are British Expats in Spain caught between a rock and a hard place when it comes to Spanish Succession Tax and UK Inheritance Tax?


The terms residency and domicile are often interchanged despite having two completely different legal meanings. Your domicile can be your residence however your residence is not necessarily your domicile. You may move abroad without changing your domicile.


Why is this important?

Spanish succession tax is based on your tax residency whereas UK inheritance tax is based on your UK domicile of origin which is acquired at birth and is usually the same as the domicile of your father at the date of your birth unless your parents where unmarried in which case you take your domicile from your mother.


Whilst you can claim and acquire a domicile of choice by settling say in Spain with the intention of living there permanently; making it stick to avoid being liable to UK inheritance tax is notoriously difficult.


The burden of proof falls on you (or more likely your heirs) to prove that you had successfully acquired a new domicile of choice.


You may avoid UK IHT after 5 years of non-UK residency. However, it’s not straightforward. HMRC will consider your ties including business interests, social connections, family, property ownership and your intentions to eventually return to your country of birth; to determine whether you are UK domiciled or not.


When it comes to UK IHT it is always advisable to plan for the worst so that a negative posthumous determination by HMRC does not reduce the inheritance of your children.


To complicate matters Spain has forced heirship rules where the inheritance is divided with two thirds going to the surviving spouse and children; and the final third being distributed freely.


The EU Succession Directive enables expats to distribute assets based on their nationality rather than the country they live. This means a British expat in Spain can avoid forced heirship rules and distribute assets as they wish.


The differences don’t end there. Whereas in the UK inheritance tax is paid by the estate in Spain the beneficiaries must settle any succession taxes before inheriting any assets.


The double taxation treaty between the UK and Spain does not extend to IHT which means that potentially you could be exposed to inheritance tax in both jurisdictions.


The good news is there are tax planning opportunities to restructure your financial affairs to avoid forced heirship rules and mitigate both Spanish succession and UK IHT.


You need a safe pair of hands to ensure your legacy is protected.


If you feel you would benefit from a second opinion consultation; please email enquiries@fwm.gi or call us on Tel: +44 207 998 0570.


Our financial advisers are fully licensed, qualified and regulated to provide financial advice in Spain and across the EU.

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