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Retire to Spain and Avoid Inheritance Tax!

Malcolm Finney looks at whether or not UK taxpayers can exploit domicile potentially to avoid Inheritance Tax.

Introduction

Despite the Conservatives’ promise to increase the level at which Inheritance Tax (IHT) becomes payable from the current level of £325,000 to £1 million nothing, as yet, has happened nor will happen until at the very earliest 2015 (if ever). IHT thus remains a problem for many people.

Perhaps the answer is to leave the UK and live elsewhere. For many ’Brits‘, both young and old, although it seems particularly true for the older person, Spain appears to be a country to which Brits flock.

So is it that easy to leave our shores, move to Spain and, hey presto, no IHT problems to worry about?

The Domicile Concept

Sadly, not. This is because IHT is based on the concept of ’domicile‘ not ’residence‘. If IHT were based on residence all would be well as it is not difficult to lose UK residence and become a resident of Spain.

Domicile is an old fashioned concept but very important for all UK tax purposes (not just IHT). In principle, it refers to the place where an individual lives and calls home. However, as every person must possess a domicile, at birth a so-called ’domicile of origin‘ arises; if you are 'legitimate' you take your father’s domicile and if 'illegitimate' you take your mother’s.

In simple terms, if your father or mother (depending upon your legitimacy or otherwise) is a British citizen (which broadly means possessing a UK domicile) then at birth you will also be UK domiciled and as a consequence are liable to IHT on worldwide assets.

If, following a move to Spain, you remain UK domiciled then you still remain liable to IHT on worldwide assets and no IHT savings occur.

So why not, on moving to Spain, simply lose your UK domicile of origin effectively acquiring a so-called ’domicile of choice‘ in Spain, in which case you will no longer be within the charge to IHT (except on UK assets e.g., a house)?  Unfortunately, the answer is that it is not quite so easy to do this.

Acquiring a Domicile of Choice

It involves living in Spain and an intention to reside there permanently or indefinitely (effectively emigration from the UK); this does not mean of course that return visits to the UK cannot be made but in essence the UK is no longer regarded as ’home‘. To convince HMRC of both aspects (particularly the second) is by no means an easy task; in fact it is very difficult, although not impossible.

What Can Be Done?

Amongst other things it would be necessary to:

• sell the UK home;
• close UK bank accounts;
• resign from any clubs/societies;
• replace any UK wills;
• sever all UK business interests;

effectively substituting a Spanish home, will, bank accounts, etc.

Assuming that this is done, IHT will only be levied on UK assets (which in any event you should no longer really own); IHT is thus avoided completely.

Caution!

One point, however, to note is that even in such a case (broadly) you still remain within the charge to IHT for 3 years after leaving the UK.

Assuming, nevertheless, HMRC accepts that you have left the UK for good and are residing in Spain you then need to consider the issue of Spanish death taxes.

Spanish Death Taxes

Spain does levy such taxes although the precise mechanics are a little different from that of the UK; in the UK it is the deceased’s estate which bears the IHT whereas in Spain it is those inheriting who bear the tax (the amount of which depends upon the relationship between the deceased and the person inheriting (e.g., spouse, son, brother etc.).

It is, as a consequence, difficult to state that in all situations Spanish death taxes are lower than those of the UK or vice versa. However, as a broad generalisation, the Spanish tax is probably on average lower than that in the UK, and thus overall a tax saving is likely to occur on a move to Spain; whether the extent of the saving warrants emigration from the UK may be open to question.

Of course, other taxes also need to be taken into account e.g. Income Iax, CGT. It may be that other countries offer a better ’tax deal‘ (possibly Cyprus, Malta, the Isle of Man amongst others?).

Practical Tip

Losing UK domicile status is not easy but is certainly possible. It is, however, not a ’do-it-yourself exercise‘ and is an area where professional advice must and should (not could) be taken. Before any move to Spain, check out the exact tax position based on your own unique set of circumstances; generalisations are insufficient and likely to be misleading.