Case Study Spanish Tax Resident Couple

Husband 60, wife 60, married, with two children who are financially independent and living in the UK

Background

• Pensions £930k
• House €1.25 M
• Investments £60k
• Cash Spain €60k
• Cash UK £184k
• Wills – UK & Spain

Challenges

• Build client understanding of pension situation and propose planning solutions
• Combined pension values were about to exceed UK Lifetime Allowance, relevant even for Spanish residents
• Difficulty calculating total pension benefits as coming from four different schemes
• When can I retire?
• No clear investment strategy
• How to minimise tax on retirement income

Better returns on funds held outside the pensions

• Bank accounts earning only 0.15%

Forward planning including Inheritance Tax

• Would the wife have sufficient income to maintain property if current pensions provided only 50% pension on husband's death?
• What would be the Spanish inheritance tax liability if one partner died?
• How would this tax be paid?
• How is inheritance tax applied in Spain and the UK?
• How can UK and Spanish inheritance tax liabilities be managed and minimised?

What we did

a)Completed a full financial review of present financial standing

b)Undertook a cash-flow forecast to establish if widow's pension was sufficient, how to pay inheritance tax on first death and how long their money would last

c)Consolidated pensions to improve tax efficiency, improve widow's pension and manage in line with their other assets

d)Built investment strategy to improve return on their investments and cash

e)Clarified how inheritance tax applies in Spain and UK and gave an estimate of tax due

f)Built an inheritance tax strategy, including provision for sufficient funds to pay tax in Spain on first death

g)Minimised Spanish tax paperwork and liaised with Spanish tax adviser

h)Produced a family inheritance tax strategy document so whole family knew the strategy without disclosing amounts held by the parents

i)Wrote to UK HMRC to obtain confirmation that the family home in Spain would qualify for the Main Residence Nil Rate Band

j)Identified UK inheritance tax saving on a UK life assurance policy

k)Carried out regular reviews over 12 years (so far) to update investment and inheritance tax strategies and to adapt to legislative changes

The Results

• Improved return on bank accounts to 3.5% pa giving an increased £4,200 pa
• Removed pensions from UK Lifetime Allowance restriction
• By providing documentary evidence from UK HMRC for Main Residence Nil Rate Band delivered an inheritance tax saving of up to £140,000
• Improved widow's pension by £7,000 pa
• Kept clients fully compliant with changing tax rules
• Answered the financial question "Am I going to be OK?" with a "Yes"

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