UK Inheritance Tax Reform 2025 and Your Spanish Property — The New Residence-Based Rules Explained

The UK Inheritance Tax (IHT) landscape changed fundamentally on 6 April 2025. For decades, whether your worldwide assets were subject to UK IHT depended on your domicile — a notoriously subjective legal concept rooted in where you considered your permanent home to be. A UK national who had emigrated to Spain, acquired a domicile of choice there, and severed meaningful ties with the UK could potentially remove their non-UK assets (including Spanish property) from the scope of UK IHT entirely. That era is over.

The Finance Act 2025, implementing changes announced in the Autumn Budget on 30 October 2024, abolished domicile as the connecting factor for IHT purposes and replaced it with a new statutory test based on UK tax residence. The new regime introduces the concept of a "long-term UK resident" (LTUR) and, critically, an IHT "tail" that continues to bring worldwide assets into scope for years after a person leaves the UK. For UK nationals who own or are considering buying property on the Costa del Sol, the implications are significant and require careful planning.

This guide explains the new rules in detail, including how they interact with Spanish Succession Tax, why certain planning structures do not work for Spanish property, and the strategies that may help reduce your combined UK-Spain inheritance tax exposure. If you are new to the Spanish property market, our UK buyers' page provides an overview of the purchasing process.

What Changed on 6 April 2025: The End of Domicile for IHT

Under the old rules (pre-6 April 2025), UK IHT applied to your worldwide assets if you were domiciled in the UK at the time of death. Domicile is a common law concept that differs from tax residence. You acquire a domicile of origin at birth (typically your father's domicile), and you can replace it with a domicile of choice by moving to another country with the genuine intention of residing there permanently or indefinitely. HMRC also applied a "deemed domicile" rule: if you had been UK tax resident for 15 out of the last 20 tax years, you were treated as UK-domiciled for IHT purposes regardless of your actual domicile.

The new regime sweeps all of this away for IHT. From 6 April 2025:

• Domicile is irrelevant for IHT. It no longer matters whether you are domiciled in the UK, Spain, or anywhere else. The connecting factor is now residence, not domicile
• The "long-term UK resident" (LTUR) test replaces domicile. You are a long-term UK resident if you have been UK tax resident for at least 10 out of the previous 20 tax years
• If you are an LTUR when you die, your worldwide estate is subject to UK IHT. This includes any Spanish property, Spanish bank accounts, investments held anywhere in the world, and (from April 2027) unused pension funds
• If you are NOT an LTUR when you die, only your UK-situated assets are subject to UK IHT. Spanish property, Spanish bank accounts, and other non-UK assets fall outside scope

The 10-out-of-20 test is objective and mechanical. There is no room for subjective arguments about intention, lifestyle, or emotional attachment — the factors that made domicile disputes so unpredictable and expensive to litigate. Either you were UK tax resident for 10 of the last 20 years or you were not.

The IHT "Tail": Leaving the UK Does NOT Immediately Remove You

This is the most important — and most commonly misunderstood — aspect of the new rules. If you have been a long-term UK resident and you leave the UK, you do not immediately cease to be an LTUR. Instead, an IHT "tail" applies, during which your worldwide assets remain within scope of UK IHT even though you are no longer UK tax resident.

The length of the tail depends on how many years of UK tax residence you accumulated:

Years of UK Tax Residence (out of previous 20)	IHT Tail After Leaving the UK
10 to 13 years	3 years
14 years	4 years
15 years	5 years
16 years	6 years
17 years	7 years
18 years	8 years
19 years	9 years
20 years	10 years

The tail is measured in complete tax years of non-UK residence after the last year of UK tax residence. For practical purposes, this means:

• A person who lived in the UK for their entire adult life (20+ years of UK tax residence) and then moves to Spain must survive at least 10 full tax years of non-UK residence before their Spanish property falls outside the scope of UK IHT
• A person who lived in the UK for 12 years, moved abroad, returned for another period, and has accumulated 13 years of UK residence in the last 20, faces a 3-year tail
• The tail applies regardless of where you move to — Spain, France, Dubai, or anywhere else

For most UK nationals buying property on the Costa del Sol, the reality is stark. If you have spent your working life in the UK (which typically means 25-40 years of UK tax residence), your tail will be the maximum 10 years. If you move to Spain at age 60, your worldwide estate will remain within scope of UK IHT until you are at least 70. If you die during the tail period, your Spanish property is part of your UK estate for IHT purposes.

How This Affects Your Spanish Property

If you are a long-term UK resident (or within the IHT tail period) at the date of your death, your Spanish property is included in your worldwide estate for UK IHT purposes. The consequences are as follows:

UK IHT Liability

UK IHT is charged at 40% on the value of your worldwide estate above the nil-rate band (NRB) of GBP 325,000. If you leave your main home to direct descendants (children or grandchildren), an additional residence nil-rate band (RNRB) of GBP 175,000 may apply, giving a combined threshold of GBP 500,000 per person or GBP 1,000,000 for a married couple (using the transferable NRB and RNRB).

However, the RNRB applies only to a qualifying residential property that is your home. If your main home is in Spain and your UK property has been sold, the RNRB may not apply to the Spanish property unless it qualifies as your "residence" for RNRB purposes (a detailed question that depends on how you held and used the property). Furthermore, the RNRB is tapered and reduced to nil for estates exceeding GBP 2,000,000.

For a couple with a combined estate of GBP 1,500,000 (including a Spanish property worth EUR 600,000, approximately GBP 510,000, plus UK assets), and assuming only the basic NRB applies (GBP 650,000 combined for a married couple), the IHT exposure would be:

GBP 1,500,000 - GBP 650,000 = GBP 850,000 taxable at 40% = GBP 340,000 IHT

Spanish Succession Tax (Impuesto sobre Sucesiones y Donaciones — ISD)

Spain also taxes inherited Spanish assets. The ISD applies to:

• Beneficiaries who are Spanish tax resident — taxed on their worldwide inheritance
• Non-resident beneficiaries inheriting Spanish assets — taxed on the Spanish-situated assets only

The ISD rate in Spain varies by autonomous community. In Andalusia (which covers the entire Costa del Sol), the regional government has introduced significant reductions. As of 2025, Group I and II beneficiaries (spouses, descendants, and ascendants) benefit from a 99% reduction on the ISD liability for inheritances up to EUR 1,000,000 per beneficiary. For amounts above EUR 1,000,000, the standard progressive rates apply (from 7.65% to 36.5%, with multipliers based on the beneficiary's pre-existing wealth).

This means that for most family inheritances on the Costa del Sol, the effective Spanish ISD payable by a surviving spouse or children is close to zero, provided the inheritance does not exceed EUR 1,000,000 per beneficiary and the Andalusian reduction applies.

However, if the beneficiary is not in Group I or II (for example, a sibling, niece, nephew, or unrelated person), the reductions do not apply and the full ISD scale — which can exceed 30% after multipliers — applies to the Spanish assets.

Double Taxation: No Treaty, But Unilateral Relief

Here is the critical complication: there is no UK-Spain inheritance tax treaty. Unlike income tax and capital gains tax, where the UK-Spain Double Taxation Treaty prevents double taxation, inheritance and succession taxes are not covered by any bilateral agreement between the two countries.

This means, in principle, the same Spanish property could be subject to both UK IHT (because the deceased was an LTUR) and Spanish ISD (because the asset is in Spain). Without any relief mechanism, the combined tax could approach or exceed 70% of the property's value.

In practice, HMRC provides unilateral relief under section 159 of the Taxation (International Relations) Act 2010 (TIOPA 2010). This allows a credit against UK IHT for overseas tax paid on the same asset that is also subject to UK IHT. The relief works as follows:

• Calculate the UK IHT attributable to the Spanish property (by apportioning the total IHT liability across all estate assets)
• Deduct the Spanish ISD actually paid on the same property
• The credit cannot exceed the UK IHT attributable to that asset — you cannot use excess Spanish tax to reduce IHT on your UK assets

Given the generous Andalusian ISD reductions for close family members, in many cases the Spanish ISD payable will be minimal (or zero), meaning the unilateral credit provides little practical relief. The UK IHT remains the primary liability. Conversely, if the beneficiary is not a close relative and pays significant ISD in Spain, the s.159 credit can substantially reduce the UK IHT on the Spanish property.

Why Trusts Do NOT Work for Spanish Property

A common question from UK buyers is whether placing Spanish property into a trust can remove it from the scope of UK IHT. The short answer is: no, and attempting it creates serious problems under Spanish law.

The UK Position

Under the new LTUR regime, assets transferred into a trust by an LTUR (or by someone who was an LTUR at the time of the transfer) remain within the scope of UK IHT. The trust may be subject to IHT at 20% on the initial transfer (if above the NRB), periodic charges of up to 6% every ten years, and exit charges when assets leave the trust. The new rules have closed the old loophole whereby non-domiciled individuals could place overseas assets into trust and effectively remove them from UK IHT.

The Spanish Position

More fundamentally, Spain does not recognise trusts as a legal concept. Spanish civil law is based on the Napoleonic Code tradition, which has no equivalent of the Anglo-Saxon trust. When Spanish authorities encounter a trust holding Spanish property, they may treat it in one of several ways, all of which are problematic:

• As a taxable gift: The transfer of property into a trust may be treated as a donation (donacion) from the settlor to the trustees or beneficiaries, triggering Spanish gift tax (which is assessed under the same ISD regime as inheritance tax, but without certain reductions)
• As belonging to the settlor: The Spanish tax authorities may "look through" the trust and treat the property as still belonging to the settlor for all tax purposes, including wealth tax, income tax on imputed rental income, and CGT on disposal
• As an opaque entity: If the trust is treated as a separate entity, it may be subject to Non-Resident Income Tax (IRNR) at 24% on imputed income, with no access to the personal allowances or reductions available to individuals

Additionally, the Spanish Land Registry (Registro de la Propiedad) does not easily accommodate trust structures. Registering a property in the name of a trust, or recording a beneficial interest held through a trust, is procedurally difficult and creates ongoing complications for any future sale, mortgage, or transmission of the property.

For these reasons, experienced Spanish property lawyers universally advise against using trusts to hold Spanish real estate. If you already hold Spanish property through a trust structure, seek specialist advice immediately to understand your exposure and consider restructuring. For more on the legal complexities of Spanish property ownership, see our property glossary.

The Pension IHT Change from April 2027

The Autumn Budget 2024 also announced that from April 2027, unused pension funds and death benefits will be brought within the scope of UK IHT for the first time. Currently, pension pots are outside the IHT net — they pass to nominated beneficiaries free of IHT (though beneficiaries may pay income tax on drawdowns). From April 2027, the value of your remaining pension pot will be added to your estate for IHT purposes.

This interacts with Spanish property planning in an important way. For a UK couple who have:

• A Spanish property worth EUR 600,000 (approximately GBP 510,000)
• UK property, savings, and investments worth GBP 500,000
• Combined pension pots of GBP 400,000

Their combined estate from April 2027 would be approximately GBP 1,410,000. Using the transferable NRB (GBP 650,000 for a couple), the IHT exposure would be GBP 760,000 at 40% = GBP 304,000. Without the pension inclusion, the estate would be GBP 1,010,000 and the IHT would be GBP 144,000 — a difference of GBP 160,000 attributable solely to the pension change.

This makes it even more important for UK buyers of Spanish property to consider their total estate — including pensions — when planning for IHT. Drawing down pension funds during your lifetime (while managing the income tax consequences) may reduce the eventual IHT liability, but this must be balanced against your retirement income needs. See our guide on Spanish wills and forced heirship for related estate planning considerations.

Planning Strategies

While the new LTUR regime is more rigid than the old domicile-based system (you cannot simply argue you have "changed domicile"), there are legitimate planning strategies that may help reduce your combined UK-Spain inheritance tax exposure.

Strategy 1: Break the IHT Tail Through Timing

The most fundamental strategy is straightforward: if you plan to retire to Spain, move sooner rather than later. Every additional year of non-UK residence brings you closer to the end of the IHT tail. If you have accumulated 20+ years of UK residence, your tail is 10 years. Moving at age 55 means you are outside scope by age 65. Moving at age 65 means you are outside scope by age 75.

The decision is not purely financial — quality of life, family commitments, and career considerations all play a role. But from a pure IHT planning perspective, the mathematics favour an earlier move. If you are on the fence about when to relocate to the Costa del Sol, the IHT tail provides a tangible financial incentive to bring the move forward.

Critically, you must ensure you are genuinely not UK tax resident during the tail period. This means satisfying the Statutory Residence Test (SRT) as non-UK resident: broadly, spending fewer than 183 days in the UK in the tax year, or fewer than 91 days if you have a UK home available. Spending extended periods in the UK during the tail period could reset your UK tax residence and restart the tail.

Strategy 2: Spanish Will Drafting — Usufruct for the Surviving Spouse

Under Spanish law, a property can be divided into bare ownership (nuda propiedad) and usufruct (usufructo). The usufruct gives the right to use and enjoy the property (including living in it and receiving rental income) for the lifetime of the usufructuary, without owning the underlying asset.

In a well-drafted Spanish will, the surviving spouse can be left the usufruct over the property while bare ownership passes to the children. The value of the usufruct for Spanish ISD purposes is calculated using a formula based on the usufructuary's age: 89 minus age = percentage value of the usufruct (with a minimum of 10% and maximum of 70%). For a 70-year-old surviving spouse, the usufruct is valued at 19% (89 - 70) of the property value.

This means the children are taxed on the bare ownership (81% of the property value in this example), and the spouse is taxed on the usufruct (19%). Both may benefit from the Andalusian 99% reduction, but the split reduces the value attributed to any single beneficiary and can help keep each individual inheritance below the EUR 1,000,000 threshold for the full reduction.

From the UK IHT perspective, the usufruct structure does not itself reduce IHT (the full property value is included in the deceased's estate), but it can reduce the Spanish ISD payable and thereby limit the potential for double taxation.

Strategy 3: Life Insurance to Cover IHT Liability

A practical approach is to take out a life insurance policy — written in trust for the beneficiaries — to cover the anticipated IHT liability. The policy proceeds, if properly structured (written under a bare trust or Section 11 IHTA 1984 trust), fall outside the deceased's estate and are paid directly to the beneficiaries, providing them with the funds to pay the IHT bill without having to sell the Spanish property.

For a couple with an estimated IHT liability of GBP 300,000, a joint life second death policy (which pays out on the second death, when IHT is actually due) might cost GBP 200-500 per month depending on age and health. This is a significant ongoing cost, but it provides certainty that the tax bill can be met without a forced property sale.

Strategy 4: Corporate Ownership — Limited Cases Only

Holding Spanish property through a company (typically a Spanish SL — Sociedad Limitada) is sometimes suggested as a planning tool. This changes the nature of the asset from immovable property to shares in a company, which may have different IHT implications depending on the structure.

However, corporate ownership of Spanish residential property has significant disadvantages:

• Annual corporate tax filings in Spain (even if the company has no income)
• Imputed income tax at corporate rates on the property's deemed rental value
• No access to the Andalusian ISD reductions for individuals
• Potential application of Spain's anti-avoidance provisions (Ley General Tributaria Article 15 — general anti-abuse rule)
• Annual wealth tax complications and potential Solidarity Tax exposure
• CGT on eventual sale at corporate rates, plus a second layer of tax when distributing proceeds from the company to shareholders

Corporate structures may be appropriate for high-value commercial property or large portfolios, but for a single residential property on the Costa del Sol, the costs and complexity almost always outweigh any IHT benefit. Take professional advice before considering this route.

Strategy 5: Lifetime Giving

Giving away assets during your lifetime removes them from your estate — but only if you survive for at least 7 years after the gift (the "potentially exempt transfer" or PET rule). If you die within 7 years, taper relief may reduce the IHT on the gift, but the full gift value is brought back into the estate if death occurs within 3 years.

Gifting Spanish property is theoretically possible but triggers immediate Spanish tax consequences: Spanish gift tax (ISD on donations) applies at rates similar to inheritance tax, and CGT is triggered as if the property had been sold at market value. The combination of Spanish gift tax and UK IHT on a failed PET (if death occurs within 7 years) can produce a worse outcome than simply retaining the property and paying IHT on death. For this reason, lifetime gifts of Spanish property are rarely advisable.

Transitional Rules: Already Non-UK Resident on 30 October 2024

The government provided limited transitional protection for individuals who were not UK tax resident on the date of the Budget announcement (30 October 2024) and who had previously been non-UK resident for a sufficient period to have lost their deemed domicile under the old rules.

Specifically, if on 30 October 2024 you were:

• Not UK tax resident, and
• Had been non-UK resident for at least 10 consecutive tax years (such that you had lost your deemed domicile under the old s.267 IHTA 1984 test)

then the transitional rules provide that you are not treated as a long-term UK resident under the new regime, regardless of your historical UK residence count. Your non-UK assets (including Spanish property) fall outside UK IHT scope immediately, without needing to wait out the tail period.

This transitional relief is narrow. It does not help someone who left the UK only recently (for example, in 2022 or 2023 and who had not yet lost their deemed domicile). It is primarily designed to protect long-established expatriates who had already structured their affairs on the basis of being non-UK domiciled and who would otherwise be caught by the new rules retrospectively.

If you believe you may qualify for transitional relief, it is essential to obtain written confirmation from a qualified UK tax adviser with specific expertise in the new LTUR regime.

Worked Example: UK Couple Moving to Spain in 2024

Let us work through a concrete scenario to illustrate the interaction of these rules.

The Facts

• David and Sarah, both aged 62, UK nationals
• Lived in the UK for 25 consecutive years (1999 to 2024)
• Moved to Marbella, Costa del Sol, in September 2024
• Purchased a Spanish property in 2023 for EUR 600,000
• UK property sold in 2024 for GBP 450,000; proceeds held in UK savings
• Combined pension pots: GBP 350,000
• Other UK savings and investments: GBP 200,000
• David has been UK tax resident for 25 of the last 20 tax years (maximum count: 20)

IHT Tail Analysis

David has 20+ years of UK tax residence in the last 20. His IHT tail is the maximum: 10 years. He left the UK in the 2024/25 tax year. His first full tax year of non-UK residence is 2025/26. He must complete 10 full tax years of non-UK residence (2025/26 through 2034/35) before his worldwide assets fall outside UK IHT scope.

If David dies before 6 April 2035, his worldwide estate is subject to UK IHT. If he dies after that date, only his UK-situated assets (UK savings, investments) are subject to UK IHT. The Spanish property falls outside scope.

Estate Value and IHT Exposure During the Tail Period

Assuming David dies in 2029 (during the tail, at age 67):

Asset	Value (GBP)
Spanish property (EUR 600,000 at 1.18 GBP/EUR)	508,000
UK savings (sale proceeds + other)	650,000
Pension pots (from April 2027, included in estate)	350,000
Total estate	1,508,000

Assuming the estate passes to Sarah (surviving spouse), the spousal exemption applies — transfers between spouses are exempt from UK IHT regardless of the LTUR status of either spouse, provided both are UK-domiciled or (under the new rules) where the transfer would have been exempt under the old rules. The spousal exemption is preserved under the new regime for transfers between spouses who are both LTURs.

The IHT exposure crystallises on the second death. When Sarah subsequently dies (assuming she remains non-UK resident and eventually exhausts her own tail), her estate may be outside scope. But if Sarah dies within her own tail period with the same assets, the calculation is:

Calculation	Amount (GBP)
Total estate	1,508,000
Less: transferable NRB (David's unused NRB + Sarah's NRB)	(650,000)
Taxable estate	858,000
IHT at 40%	343,200

Of this GBP 343,200, the portion attributable to the Spanish property (approximately GBP 508,000 / GBP 1,508,000 = 33.7%) is GBP 115,658. If Spanish ISD was paid on the property inheritance (likely minimal under Andalusian reductions for Group I/II beneficiaries), the s.159 TIOPA 2010 credit would offset some of this. But with the 99% ISD reduction in Andalusia, the Spanish tax credit is likely to be negligible, and the UK IHT on the Spanish property is effectively the full GBP 115,658.

Planning Opportunities for David and Sarah

• Ensure genuine non-UK residence: Both David and Sarah must remain non-UK tax resident throughout the tail period. Extended UK visits, retaining a UK home, or UK-based economic activity could jeopardise their non-resident status
• Spanish wills with usufruct: A Spanish will leaving the usufruct to the surviving spouse and bare ownership to children minimises Spanish ISD (and avoids the need to apply for the inheritance through the UK probate system)
• Life insurance: A joint life second death policy of GBP 350,000 written in trust would cover the IHT liability and prevent a forced sale of the Spanish property
• Pension drawdown planning: Drawing down pension funds gradually during retirement (paying income tax on the drawdowns) rather than leaving a large pot to be taxed at 40% on death
• Annual IHT review: As each year passes and the tail shortens, the planning can be adjusted. Use the MUNDO calculator to model different scenarios

Key Dates and Action Points

Date	Event	Action Required
6 April 2025	New LTUR regime takes effect	Review your UK residence history and calculate your tail period
April 2027	Pensions brought into IHT scope	Review pension pot size and consider drawdown strategy
Ongoing	Each tax year of non-UK residence	Maintain records proving non-UK tax residence (SRT analysis)
Annually	Review estate planning	Update wills, review life insurance, monitor property values

Summary

The 2025 IHT reform is the most significant change to UK inheritance tax in a generation. For UK nationals who own or plan to buy property on the Costa del Sol, the key takeaways are:

• Domicile no longer matters for IHT. The new test is purely residence-based: 10 out of 20 tax years makes you a long-term UK resident
• The IHT tail means leaving the UK is not an instant fix. With 20+ years of UK residence, your worldwide assets remain in scope for 10 years after departure
• Spanish property is included in your UK estate if you die during the tail period. At 40% above the nil-rate band, the tax bill can be substantial
• No UK-Spain IHT treaty exists, but HMRC's unilateral relief under s.159 TIOPA 2010 may prevent full double taxation
• Trusts do not work for Spanish property. Spain does not recognise trusts, and the new UK rules have closed the old trust-based IHT planning opportunities
• Pensions enter the IHT net from April 2027, significantly increasing estate values and potential IHT liabilities
• Planning strategies exist: timing your move, Spanish will drafting with usufruct, life insurance, and pension drawdown can all help reduce the combined UK-Spain tax exposure
• Professional advice is essential. The interaction of UK IHT, Spanish ISD, the new LTUR rules, and the pension changes creates a level of complexity that requires specialist cross-border tax advice

For a comprehensive overview of buying property on the Costa del Sol, visit our UK buyers' page. To understand the costs involved, use our interactive property calculator. For related topics, see our guides on Spanish wills and forced heirship and capital gains tax when selling Spanish property. And for definitions of key terms, consult our property glossary.