My mother (a widow) has lived in the Costa Blanca since November 2004. She is a UK passport holder but a Spanish resident. She has made a will in both the UK and Spain. She has no mortgage and very little money in a Spanish bank account - all her savings are in the UK. She is the sole person on the deeds to her property. I have heard that the Spanish government would be entitled to 40 per cent of the value of her home on her death. Is this correct? Also how does this affect my Mum's savings?
In the UK, as a general rule of thumb, single people with assets worth less than £325,000, or married couples with assets of less than £650,000, are not subject to inheritance tax. The rates and allowances in Spain however are less generous. When your mother passes away, Spanish inheritance tax will be payable on all your Mother's assets situated in Spain - and if you and your brother were also resident in Spain, it would also be payable on her assets outside Spain.
The rate of tax varies depending on the size of the net estate and the relationship between the beneficiary and the deceased. The tax-free allowance is relatively small but unlike in the UK, each beneficiary has a separate allowance.
Tax is then levied on a sliding scale. The first 'slice' of value subject to tax at a lower rate than the last 'slice' of value. The tax is then subject to a multiplier depending on the relationship of the beneficiary to the deceased and the value of the estate. The top rate of tax applicable to a child of the deceased with a substantial estate is 40.8 per cent, but that would not be the average rate applying to the whole estate - only the rate applying to the top 'slice' of value in the case of a higher value estate.
One way in which you may be able to reduce Spanish inheritance tax is if your mother takes a mortgage against the property and deposits the proceeds in a bank account outside Spain. If your mother retains a UK domicile then her estate may also be subject to inheritance tax in the UK. Any money she has in bank accounts in the UK is subject to inheritance tax regardless of domicile.
Since the method of calculation is different, there may not be any UK inheritance tax payable, in addition to which UK inheritance tax on your mother's property will be reduced (possibly to zero) on account of the Spanish tax payable."
You may also find it beneficial to talk to an adviser in Spain to get a better idea of the amount of Spanish tax likely to be payable.