Warning over double inheritance tax trap if you move to Spain – experts reveal what you need to know…

My wife and I are approaching retirement, and we are considering whether we want to stay in the UK.

My son is going to take over our family business and I plan to transfer some shares to him.

One of our options is to move to our second home in Spain, and live there full-time and rent out our home in the UK.

We’ve been told that it could be a good way to reduce our son’s inheritance tax bill too.

Is this true and could it be a good option for us?

Angharad Carrick of This Is Money says: As the Government considers more changes to the tax regime, you’re not the only one considering moving abroad.

Beyond the sun, sea and sangria, moving to Spain means that, in theory, your estate could avoid paying as much inheritance tax (IHT) when you and your wife die, because inheritance tax is only applied to UK assets.

However, the reality can often be more complicated, so we asked a tax expert to help answer your query.

What are the consequences of moving abroad?

Before considering any tax implications, one of the first things to consider is how easy it is to move and live abroad.

You say you already own a home there, so you’re likely very familiar with the local area, but moving full-time is a different kettle of fish, not least for your residency status.

David Denton, tax expert at Quilter Cheviot says: It’s essential to consider post-Brexit regulations regarding your right to live in Spain. You would need to ensure that they have the appropriate residency status to reside there full-time.

Additionally, it’s important to note that Spanish heirship rules differ from those in the UK, meaning the options available under the UK will may not automatically apply in Spain.

Robert Salter, partner at accountancy firm Blick Rothenberg says: Following the cessation of the ‘domicile / non-domicile’ system of taxation from April 2025 it is now easier for British born and domiciled individuals to avoid a liability to IHT on their UK-based assets, if they become ‘long-term’ non-residents from a UK perspective. 

However, please note that simply moving overseas is not – by itself a type of magic ‘panacea’ for most individuals. 

Angharad Carrick says: You must tell the Government that deals with your pension and tax if you’re retiring abroad and then apply for the appropriate visa.

Residency will be on a temporary or permanent basis, depending on your circumstances.

Temporary residency is authorised for a stay longer than 90 days and less than five years, and initial authorisation without a work permit will only be granted to those who can prove sufficient economic means, the Spanish government says.

Foreign citizens who have had temporary residency in Spain for five years continuously and continue to meet the conditions will be entitled to long-term residency.

The most common option for retiring to Spain is the non-lucrative visa, which allows individuals to live in Spain without working.

Typically, you’ll need to demonstrate an annual income of around €30,000 (around £26,000) for the main applicant and an additional €7,000 (£6,000) for each dependent.

Living costs will depend on your lifestyle but you likely have a rough idea of how much you’ll need to spend on groceries, bills and other expenses, given you already have a home there.

What are the tax implications of moving to Spain?

You plan to retire to Spain, but you must consider the tax implications. Thankfully, there is a double taxation agreement between the UK and Spain, which means retirees won’t face double taxation on their income.

However, you will have to pay Spanish taxes on worldwide income.

You’ll still be able to access your UK state pension while living in Spain, or you can transfer into a qualifying recognised overseas pension scheme, which can sometimes provide tax advantages but can incur fees or taxes.

You’ll also need to consider property taxes on your home, and crucially, inheritance tax rules in Spain differ from the UK.

Lisa Caplan, director of Charles Stanley Direct Advice and Guidance says: If you have spent 183 days or more in the UK in the relevant year, you will be resident in the UK for that year. 

If you pass this first test, HMRC will look at whether you have significant ties to the UK, including regularly renting, staying or owning a property in the UK; spending more than 90 days in the UK in previous tax years, among other things. Continuing to own and rent out the property could be seen as a significant tie. 

It is important to keep good records of when you are visiting the UK, to show you have not been in the UK for more than 90 days each year. 

It is important to note that UK assets will still be assessed to UK IHT. 

What does moving abroad mean for IHT?

 Robert Salter says: From a UK IHT perspective, even if you do successfully break UK tax residence and do (eventually) qualify for the new ‘long-term non-residence regime’ for IHT purposes, this does not mean that you (or officially your estate), are automatically totally outside the UK IHT net on your deaths.

This is because, UK-sited assets – whether it is the house or potentially the shares that they retain in the UK based company or their wider UK investments say – would continue to be liable to UK IHT.

Depending on how the other country treats IHT per their domestic laws, moving overseas can actually create more complexity from an IHT perspective, than would be the case with ‘normal taxes. It might even in some cases create some type of genuine ‘double tax liability’. 

That is, one might in some cases be liable to UK IHT and liable to the overseas equivalent of IHT at the same time without any off-setting ‘tax credits’ necessarily being available.

David Denton says: The Spanish equivalent of inheritance tax, known as ISD, can vary significantly. It can be higher or lower than the UK’s 40 per cent liability, depending on the region of Spain where one resides.

This is because, UK-sited assets – whether it is the house or potentially the shares that they retain in the UK based company or their wider UK investments say – would continue to be liable to UK IHT.

Depending on how the other country treats IHT per their domestic laws, moving overseas can actually create more complexity from an IHT perspective, than would be the case with ‘normal taxes. 

It might even in some cases create some type of genuine ‘double tax liability’. 

That is, one might in some cases be liable to UK IHT and liable to the overseas equivalent of IHT at the same time without any off-setting ‘tax credits’ necessarily being available.

Another critical point is that ISD is levied on the recipient rather than the estate of the deceased.

Angharad Carrick says: Inheritance tax in Spain applies to residents and non-residents who inherit assets there.

Unlike in the UK, the obligation to pay IHT in Spain lies with the person receiving it, rather than the estate itself. 

But it does apply to expats if they are living in Spain at the time of death.

In your case, your son may have to pay tax on your Spanish home but the rate will depend on how much the house is worth. Spanish IHT rates range from 7.65 per cent to 34 per cent.

If you’re liable for Spanish IHT, you must pay it within six months. It might be worth drafting a Spanish will to ensure your assets are distributed as you wish.

Robert Salter says: The UK IHT regime has a system of ‘Potentially Exempt Transfers’ (PETs). 

This means that where a parent transfers assets to their children or grandchildren, for example, the transfers (regardless of value) trigger no tax liability in the UK at the time of transfer and will also avoid IHT, assuming the person giving the gift away lives for 7 years or more thereafter.

Depending upon your wider situation and financial situation it might therefore be perfectly possible for you to avoid an IHT liability arising on assets such as your company shares even if they stayed fully in the UK (albeit clearly planning and thought is typically required in many of these cases).

Can you avoid paying IHT in the UK?

David Denton says: When it comes to tax implications, adding another country like Spain into the mix can undoubtedly complicate matters. 

Unfortunately, the UK has very few double tax treaties when it comes to IHT, only ten in total, and Spain is not included in this list. 

This means there’s no automatic offset of taxes if liabilities arise on the same assets in both countries.

Assuming one lives outside the UK for more than ten full tax years, they are no longer considered a long-term resident of the UK. 

This means that only their non-UK situs wealth is subject to UK inheritance tax, beyond any reliefs, allowances, and exemptions.

However, transferring shares to your son while still in the UK and assuming you then live seven years could indeed be very helpful, although some business assets currently enjoy full exemption from inheritance tax (known as business relief).

However, this is changing from the start of the coming tax year, where £1 million per donor will benefit in full, as opposed to an unlimited amount.

Is it worth moving abroad to dodge IHT? 

Lisa Caplan says:  Gifting company shares to your son could be useful. Company shares, if unlisted, could potentially get IHT relief of up to £1million. 

But as you’re retiring, it may make sense to transfer shares for reasons not related to IHT, for example to give the son a controlling interest in the company.

A very useful IHT allowance is the residence nil rate band which can mean up to £500,000 additional IHT allowance on a UK home left to a child or grandchild. This will be lost if there is not a UK home.

I would suggest that you work out the potential IHT saving of moving to Spain, and balance that with the restrictions on the time you can spend in the UK visiting family.