IHT (Inheritance Tax) planning is certainly not as simple in Spain as the UK, but there are solutions if you get the right advice.
A typical scenario here in Spain is that of my clients, a husband and wife, who have been retired here in Spain for 12 years, and own a property here. They also have 2 investment properties in the UK and savings and investments totalling approximately £300k. When they both pass away, they want to leave their entire estate to their two grown up children, who both live in the UK.
Their Worldwide assets will be subject to UK IHT, as they are seen as UK domiciled, and their Spanish based assets will also be subject to Spanish IHT (although with the double tax agreement, they can claim relief on this part of their UK bill).
As a couple, the first £650k will be free of UK inheritance tax. As their primary residence is not in the UK, they will not benefit from any primary residence tax relief in terms of their UK properties. The total value of their 3 properties will use up all their £650k UK tax free relief.
This means that their savings and investments of £300,000 will be fully subject to UK IHT at 40%, which will leave a bill of approximately £120,000, potentially more if they hold some of these savings or investments in a Spanish bank or institution. The good news is, with proper planning, we can save their beneficiaries this entire £120,000 bill.
The key to Spanish IHT planning is that to avoid Spanish IHT both the beneficiary and the asset must be outside Spain. Once you’ve ticked this off, your remaining issue is the UK IHT allowance. This is where trust planning comes into play.
What we were able to do with this couple is to place their savings and investments into a Spanish compliant investment bond, a bond recognised by the Spanish tax authorities, but crucially based outside Spain, and then move this bond into a trust for their children.
In terms of the Spanish bond, this is a tax efficient plan designed for Spanish residents, which allows my clients, cautious investors, to target investment returns of around 4-5% per year. Despite being in trust, they can still make regular withdrawals to supplement their pension incomes, pay for holidays, a new car etc. When they both pass away, the trust element will mean the proceeds of their investment bond will be paid in full to their children without being subject to Spanish or UK IHT, saving that £120,000 IHT bill.
Even more reassuring for my clients was the fact that the institution I recommended for this solution is a FTSE 100 company with nearly 20 million clients Worldwide.
Whether you’re looking to improve the returns on your savings or investments, explore your pension options, or come up with robust IHT planning solutions, a free consultation with Chorus is the best place to start.
Please call me direct on 664 398 702 or email s.kelly@chorusfinancial for more information.