Many British expatriates living in Spain think they’ve left the UK taxman behind along with the English weather. If you’re tax resident in Spain this is true to a certain extent, but it’s very likely that you’re still liable for UK inheritance tax (IHT). This is because it is based on domicile, a far more permanent concept than residence.
It’s easy to become resident in Spain instead of the UK. It’s much more difficult to obtain Spanish domicile. Your place of domicile is not necessarily the country with which you have your closest personal association or where you are resident. You could live in Spain for many years and remain domiciled in the UK. This means you remain fully liable for UK inheritance tax on your worldwide assets.
Domicile is a concept of UK common law. The basic rule is that you are domiciled in the country in which you have your home permanently or indefinitely. One less technical way of describing it is as the place you intend to die. English law recognises three kinds of domicile:
Domicile of origin: Usually your father’s domicile at the time of your birth. It never changes and revives automatically if there’s any doubt about your domicile of choice in the future.
Domicile of dependence: Today only children and mentally handicapped persons acquire a domicile of dependence.
Domicile of choice: This can replace your domicile of origin or dependence, but it’s no simple matter as there’s usually a strong presumption in favour of retaining your domicile of origin. Your UK domicile status will revert automatically if you leave Spain until you establish a new domicile of choice, regardless of how long you were domiciled in Spain.
For a domicile of choice to replace your domicile of origin you must be physically present in Spain, a Spanish tax resident and intend to reside in Spain permanently and be able to prove this. To become a Spanish domicile you will need to build up evidence to show you have severed connections with the UK and regard Spain as your permanent home.
You may have one opinion on where you are domiciled and the UK Inland Revenue another one. It will impose inheritance tax on anyone it deems domiciled in the UK, and not only those actually domiciled there. Careful planning and professional experienced advice are essential.
Domicile is only officially established at the point when a tax liability is being reviewed, for example, when inheritance tax is due. This means that even if you live in Spain for many years, if you move back to UK before you die the Revenue will consider you a UK domicile and charge your estate inheritance tax… which could have been avoided with careful advance planning.
UK IHT is a cross between death duties and gift tax. It’s payable on the value of all the assets you own on death, those given away in the previous seven years and on certain lifetime gifts. If you are domiciled in the UK, no matter where you live, you are liable for IHT on your worldwide assets including all those in Spain.
Even if you acquire a domicile of choice in Spain, if you retain assets in the UK with a combined value of over £263,000 (2004/05 rate), these remain liable to IHT. Careful tax planning can, however, still help you avoid IHT liabilities.
IHT is not payable on death when the assets pass to a surviving spouse, but your remoter dependants (e.g. your children) will face a large tax bill (40% on everything over £263,000) on the death of the surviving spouse. Clearly, a widow or widower returning to the UK could have devastating IHT consequences.
Note: that may also be liable for local succession taxes here in Spain on some or all of these assets.
All this talk of planning ahead for one’s death may seem unwelcome, but as no man is immortal these issues do need to considered at some point – and the sooner the better. Why risk leaving your dependants a large tax bill when this can be avoided with a little planning?