Spanish Residency and Tax

grasscutter_2

My wife & I have a house in Spain & a house in England. It would save us a lot of Spanish tax if we took up residency in Spain. But if we do that, if either of us dies the english home will be subject to Spanish tax laws at up to 35% of the value. Is there any way we could gift our english home to our children with the provisor that we can still use it ourselfs, therefore offsetting any tax to payed by our children on our deaths

Mrs_pbradley936

No if you give something away but still have the use or any gains from it it is not viewed as a gift by the revenue. But you could keep it and rent it out to enjoy the income from it if you are not there. You would have income tax to pay on it but how much would depend on what else you had in the way of income.

Mrs_pbradley936

There is a person on here who lives in Spain and has a house in England and if she comes on she will be able to answer you better than me.

Cook_County

From what you have said you are both domiciled in England & Wales. Consequently you will be subject to UK IHT on death, subject to the spouse exemption.

As pbradley936 says you would continue to have the UK house in your UK estate if you gifted with a reservation of benefit. Thus from a UK perspective there would be no IHT on the first death but there would be UK IHT on worldwide assets - including the UK house - on the second death.

From a Spanish perspective you will find that gifting your property at death will be subject to local forced heirship rules, no matter what your English will says.

The first thing to do therefore is to ensure that your UK and Spanish wills are adequately designed with tax in mind (I assume you have Wills already??).

You may find from an income tax perspective that it is very difficult today to shake off UK ordinary residence following the recent Shepherd case. This does not mean that you may not also be domestically resident in Spain. If you happen to be resident in both countries under their respective tax regimes then you will need to turn to the tests for residence in the UK/Spain double tax treaty.

The answer is - overall - complicated.

Mrs_pbradley936

Can I be nosey and ask what the advantages are to changing your domicile to Spain? I have lived abroad but kept my domicile as the UK because it was never going to be permanent. Some things may be cheaper but others are far more complicated and if you start having to hire professionals to sort it all out it can cost you a small fortune. If you live in Spain chiefly to escape from our winters I think you may be better to keep your domicile as the UK.

My aunt lives in Spain but could not afford to own a house here and one there so she sold up here. Worst thing she could have done, she would have been much better off keeping the house here and renting there because of the equity the house has accumulated over the years. They sold here for £150k and bought there for £30k but the house in Essex would now be worth £300k but the house in Spain only £65k. She could have rented her UK house out to pay for any expenses. You can have all your mail forwarded and if you have to get back to the UK for any reason it is only a couple of hours away.

Cook_County

From a UK perspective one can acquire a new domicile of choice by severing all connections in ones existing domicile and deciding to settle in a new place for the remainder of one's life.

From a UK perspective moving to - say - Spain permanently would after at least 3 complete UK tax years avoid worldwide IHT on death.

However if one retains significant connections in England & Wales (or one of the other nations within the UK) then one has not changed domicile.

Thus changing from a UK domicile would imply closing all UK savings, selling UK property, changing away from a UK driving licence, having ones Will drawn up under the laws of the new domicile, not telling your friends that anywhere in the UK is 'home', visiting the UK very infrequently as a tourist etc.

Please do not confuse domicile with either residence or ordinary residence, as each of these 3 terms have distinctly different meanings. Historically going for the 'Beckham' tax regime in Spain saved money, but you would need local Spanish advice on forced heirship, income tax, wealth tax and tax on death.

grasscutter_2

Thank you to pbradley936 and Cook_ County for your informative answers my query. There is one further question I would like to ask Cook-County:-

What is the difference between domicile, residence and ordinary residence. The only terms we have come across in Spain is resident & non resident?

Mrs_pbradley936

In a nutshell Domicile is where you pay your taxes! I can only tell you about the USA because that is the only place I have first hand knowledge of. The terms resident and non resident mean different things to different organisations. For example we own a house in the USA but are domiciled in the UK, pay UK income tax, national insurance etc. but owning the house qualifies us for getting a residents rate for a fishing licences or a residents rate if we want to get into theme parks. A resident pays property tax and so can use the libraries, there is no health service in the USA but in other places residency may qualify you for that.

The way it was explained to me but I am not sure if it is a legal definition is whether you consider yourself to be “British” but live abroad or if you have become, in your case “Spanish”. Dual citizenship exists of course but the only people I know that have that is where someone has married a spouse from another country and/or let their children have dual nationality.

Cook_County

I am sorry but the previous post is quite incorrect.

If I set up a small business in France and Sweden tomorrow, but keep my home in the UK - appointing local managers in each place - I do NOT become domiciled in either place. I retain my domicile in England & Wales, although I may have to file & pay taxes in both places.

Domicile is a concept that dates back to the Roman concept of 'domus' or home. In the UK one is domiciled in the jurisdiction that ones father is domiciled in at birth unless one settles permanently in a new location.

The UK also has distinctions between residence & ordinary residence.

One is ordinarily resident in ones customary residence. This is different from one's permanent place of domicile.

Spain, as you say, only looks at residence or non-residence. However you will also need to consider treaty residence which can over-ride the domestic rules in either country.

In the United States domicile is used for State purposes in considering liability to State estate taxes. The definition is similar to the UK version (because both sets of laws are based on English civil law), but generally tends to look much more at facts & circumstances than the UKs version that looks more t one's fathers and ones own intentions.

If bradley is arguing that he is a resident of the municipality or county where his house is located he is opening himself to the expectation by the State where the home is located of the filing of both annual resident income tax returns and State domiciled estate tax returns on death.

Mrs_pbradley936

I am not arguing anything, just outlining my own circumstances. It must be legal because I have to be interviewed by the US Embassy in Grosvenor Square. I have not sought ”Resident Alien” status nor do I want a Green Card because the visa I have suits my purpose. I have owned a few houses there over the years and the only taxes I pay are property taxes which are 1.5% of the value of the home. There is a withholding tax if a non American citizen sells a property which is why I do not move as often as I might otherwise. In the past I have filed a US tax return and do have a Tax I D number but these days spend the majority of the time in the UK.

seven-day-weekend

We have a house in Spain and a house in England. We had wills written by a professional expat 'will-drawer-upper' (sorry, don't know what they are called) here in Spain for our UK and Spanish properties, with a Spanish translation for the Spanish will. We are Spanish resident at the moment.

Presumably these wills will be carried out in accordance with our wishes? I'm getting worried now, with the talk about 'forced heirship'. I thought that was why you made a will so that your wishes were carried out?

We don't mind so much about the Spanish house, but want the UK house to go to our son when we've gone.