Inheritance Tax After Brexit Expat Tips

It may seem as though Brexit has been going on forever, but UK citizens should not become complacent concerning the – sometimes considerable – changes which will take place in the near future.

Spain is one of the major overseas destinations in which British citizens own second homes. Even now, the number of homes being acquired by British buyers in Spain amounts to around 10,000 per year. It is estimated that the number of Spanish properties under British ownership could be as high as 600,000.

It is therefore of vital importance that such homeowners take the time to find out how their overseas assets will be taxed in accordance with the stipulations of their will.

Succession Law in Spain

On 17th August 2015, the new EU Succession Regulation No. 650/2012 (also known as “Brussels IV”) came into effect. Denmark, Ireland and the UK do not participate in this Regulation. In the UK, the applicable law with regard to immovable property is the law of the country where the property  is situated. Nonetheless, the possession of property in Spain is an important factor for British nationals. The new EU regulations affect all aspects regarding inheritance and wills but are often overlooked by UK nationals who own property in Spain due to the simple fact that the UK opted out of the legislation. It is, however, vital to not underestimate the impact of these new regulations, as any wills made prior to the 2015 date must be updated in order to comply with their provisions for assets in Spain.

Expats living in Spain are not legally required to make a Spanish will, irrespective of which national law will apply, or whether their assets are based in Spain or abroad. Foreign wills concerning property and assets in Spain are recognised by Spanish law. However, for foreign residents who have either not left a will or have left a will but have not therein stipulated that the laws of another country shall apply, Spanish inheritance law will apply, as well as the “forced heirship rule”.

This new EU Succession Regulation aimed at “removing the obstacles to the free movement of persons who currently face difficulties in asserting their rights in the context of a succession having cross-border implications”, i.e. it should simplify international inheritance rules and the way assets in EU member states are taxed.

Generally speaking, it states that the applicable succession law will be that of the country in which death take places, unless specifically stated otherwise in the deceased’s will. This means that if you make a will in the UK but do not specify that UK law should be applied, Spanish succession law will be applied in the event of your dying in Spain.

A major factor in such matters is the “habitual residence” at the time of death. Most member states did not utilise this factor prior to the implementation of the Succession Regulation; they instead applied the law of the state of nationality or domicile or the location of the asset.

The Succession Regulation does not define the term “habitual residence”. Instead, the use of an autonomous interpretation is implied, guidance for which can be found in Paragraphs 23 and 24. In a nutshell, the Succession Law provides each citizen with the possibility of choosing the legislation he/she wishes to have applied in the event of his/her death.

The Regulation thereby offers three possibilities:

1). The principle, under which the law of the State is applied in which the deceased had his/her habitual residence at time of death. This can also be the law of a non-EU member state.

2). The exception, under which the law of the state will be applied to which the deceased had closer connections at the time of death.

3). The option to choose the law of one of the states whose nationality is possessed.

In the UK, it is usual to leave everything to your spouse in your will. “Free disposal of assets” applies. In Spain, wills are limited  - even if you die and leave a valid will, a fixed percentage of your possessions must be given to your relatives.

A will drafted in Spain must be signed by a notary and submitted to the Central Registry of Wills. It is therefore essential to ensure that the drafting is absolutely clear and unambiguous, stating that UK law must be applied. This then avoids what is known as the “forced heirship rule,” and no aspects of Spanish inheritance law will apply to your assets, either Spanish or worldwide.
It is possible to have one will in the UK and another in Spain. A Spanish will could, for example, be applied solely to assets in Spain, whilst the UK will would regulate assets in the UK. This must be carefully considered, as small errors or the failure to update the content of a will could lead to considerable problems concerning taxation and the distribution of assets.

Spanish Inheritance Tax

So what effect do the new EU Regulation and Brexit have on inheritance tax and cross-border administration of assets?

Inheritance tax in Spain must be paid by all Spain-based residents who receive an inheritance, as well as by non-residents who inherit property in Spain. Following the introduction of the new laws in 2015, both residents and non-residents are now treated the same for tax purposes as regards rates and allowances. Spanish inheritance tax rates are set by the national government and are progressive, based on the amount inherited. Tax-free allowances are , however, available to relatives of the deceased. The allowance depends on the relationship between the deceased and the beneficiary.

As mentioned above, it is possible to have both a UK and a Spanish will. Under the new Regulation, you can choose to apply English law in your Spanish will. The applicable UK probate rules must thereby be taken into consideration – something of particular importance as regards taxes. A British person domiciled and resident in Spain will be subject to tax in the UK on their property in Spain (the Spanish property is thereby part of the worldwide assets).

Under Spanish property law, ownership is recognised according to the name on the title deed; it is therefore important to register any property in Spain in order for it to be included as part of your estate.

It must be taken into account that the British resident in Spain will pay taxes on his or her worldwide assets in both countries; the UK may, however, apply a unilateral tax relief. Regardless of whether the deceased was resident in Spain or elsewhere, the recipients will be liable for the payment of taxes on all assets and property held in Spain.

It is important to note that it is not the estate which is taxed but the recipients of the estate. This is a major difference between the UK and Spain and must be taken into consideration. Also of importance is the fact that even if the deceased is in the U.K and has no assets in Spain, the successors living in Spain will be taxed for those assets inherited outside of Spain.

Tax amounts and tax allowances in Spain are determined regionally; they vary from region to region and can be changed significantly by the respective authorities. It should be noted that lifetime gifts are also subject to tax. Furthermore, an estate will not be released by the Spanish authorities until all Spanish inheritance tax has been paid. Beneficiaries are allowed six months in which to pay the taxes but are able to claim a one-time extension or to pay in instalments.

In the event of a death, the executor must contact the Spanish Tax Agency (Agencia Estatal de Administración Tributaria (AEAT)) within six months. Non-residents will be required to provide a Spanish tax reference number (Numero de Identificación de Extranjero (NIE)). A Spanish tax representative (Representante Fiscal) must be appointed, in order to ensure proficient handling of the matter.

The process is extremely complex and in all cases it is advisable to seek professional advice from both a tax adviser and a lawyer with suitable qualifications and experience in such matters.