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UK Inheritance tax and living in Valencia

By John Hayward
This article is published on: 30th April 2024

Every so often, I write about this cheery subject but it really is worth getting to know the basics if you do not want to suffer from, or leave your beneficiaries exposed to, the slings and arrows of outrageous tax complications. There are proposed changes to UK inheritance tax which I will discuss below.

Inheritance tax in Spain has pretty much disappeared, for some and for the time being. For example, in the Valencian Community, there is an inheritance tax (and gift tax) allowance of €100,000 for spouses, grandparents, parents, children, and grandchildren. For younger beneficiaries, the allowance is higher, as it is for those with qualifying disabilities. Since 28th May 2023, there is also a 99% reduction on the tax bill for spouses, etc. This means that there is little or no tax due for the relevant category. I am not going to write about the different tax bandings but you can contact me if you want to know more.

Taxes in Spain tend not be abolished but rather put on hold or reduced, temporarily. In Valencia, this “new” 99% reduction is the same as the old 99% reduction which was in place up until 2013 when it was reduced to 75% and subsequently 50%. Asset distribution is an important consideration, making certain that, should the thinkable happen, i.e. the reduction is changed again, spreading wealth as tax efficiently as possible is key. (Spending everything is also a way of reducing any inheritance tax liability albeit to the disappointment of those expecting some handy cash.)

When it comes to beneficiaries who do not tick the right boxes, planning is even more important. One of the fairly common situations I have come across is where couples in their second or third marriage have children, from different marriages, who are beneficiaries on the death of their parent and/or step-parent. The inheritance tax allowances above do not apply if the child is not a direct relative.

Allocating assets through a will could alleviate this problem. Spain will apply inheritance tax to an asset in Spain or an individual resident in Spain. A UK asset inherited by a UK resident will not be subject to Spanish tax.

Therefore, planning is necessary to decide which child receives which asset. (See below for proposed UK inheritance tax change).

Although you might read that the double taxation agreement between Spain and the UK does not cover inheritance tax, tax paid on the UK estate can be deducted proportionately from the individual’s tax liability in Spain.

Proposed changes to UK inheritance tax
The UK government is looking to move from a domicile basis to a residence basis. To determine where one is domiciled can be a complicated exercise.

The UK government website states: HMRC will treat you as being domiciled in the UK if you either:

  • lived in the UK for 15 of the last 20 years
  • had your permanent home in the UK at any time in the last 3 years of your life

The proposed change, effective from 6th April 2025, will be to charge individuals who have been UK resident for 10 years and keep them on the radar for 10 years after leaving the UK. This would mean that after 10 years in, say, Spain, only UK assets would be subject to UK inheritance tax. This leads us back to my point about asset distribution. Where possible and necessary, assets should be allocated to beneficiaries based on their residence to maximise the tax allowances in both the UK and Spain.

We specialise in arranging savings and investments in a tax efficient manner and have saved clients and their families thousands in taxes on the death of a spouse, partner, or parent, or even an unknown uncle in one case. I am certain that we can help you too.

Article by John Hayward

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