As the number of Britons taking up residence in Spain and France soared to a total of 961,000 by the end of 2006, the WAY Group reported a ‘significant’ rise in enquiries from expats concerned by highly complex taxation laws in both France and Spain, especially for Brits who are non-domiciled – i.e., living permanently in one of these countries.
“Up until quite recently we had little or no enquiries on the IHT abroad issue but IFAs are increasingly being asked to restructure clients' affairs ahead of emigration to the sun. As a result WAY is being asked for comments on the IHT aspects of leaving the UK which is, of course, quite a grey area,” said WAY Group chairman Paul Wilcox.
A key fact which Britons retiring to live in France need to be aware of is that there is no exemption beyond the €76,000 personal allowance on transfers between husbands and wives on death – and, according to the Institute for Public Policy Research (IPPR), there are some 200,000 expat Britons that permanently reside in the country.
“Clearly, in the case of better-off expats, this relatively frugal allowance means that many Brits will be vulnerable – and if assets go directly to the children, each child only has a personal allowance of €50,000,” said Wilcox.
“Then tax from 5 up to 40 per cent will be levied – and many Brits are unaware of the fact that the kids actually have more rights than the spouse under French law.
“Unmarried Brits who live together are also very exposed – as the French will hammer you for 60 per cent.
“But the French tax authorities also have a system known as ‘assurances-vie’, which will allow unlimited amounts to be sheltered from punitive Gallic IHT laws – but it is crucial to set up an IHT mitigation plan before taking up residency."
Spain, currently host to 761,000 full time resident Brits also has quirky death tax laws. Unlike the UK, assets in Spain do not pass automatically to spouses tax-free on the first death, and the surviving spouse can be vulnerable to Spanish inheritance tax.
“The tax-free allowance is just €15,957, and a further 34 per cent kicks in on amounts over €79,755 – but, in some circumstances, for example if they are not a blood relative, expats can be liable to pay 82 per cent under current Spanish law, unless they have made pre-domicile arrangements,” said Wilcox.
More and more expat Brits are also being caught out by UK IHT, which is payable on ‘worldwide’ assets when they die, depending on their domicile status.
“To change to a domicile of choice, a person needs to prove that they are a resident of that new country and that they intend to reside there permanently or for an unlimited time.
“Retaining residential property or even a burial plot within the UK can give the Revenue enough ammunition to challenge your domicile of choice abroad,” warned Wilcox.
"Pretty much regardless of where you are going, it is important to remove assets from one’s estate before leaving.
“But in doing so, it is vital to ensure that reliable trustees looking after those assets have the power to release funds as necessary back to the donors and, where required, to other named beneficiaries. Failing to do this is where so many expats fall down,” added Wilcox.
