Succession planning is not a conversation most British expats in Spain have had properly. The assumption, understandably, is that once you have moved abroad and made Spain your home, UK inheritance tax is largely behind you. The reality is more complicated, and for most British expats in Spain, the UK’s inheritance tax reach extends considerably further than they expect.
Spain’s Inheritance Tax: More Variable Than You Think
Spain has its own succession and gift tax (Impuesto sobre Sucesiones y Donaciones, or ISD), and it is one of the most regionally variable taxes in the country. At the national level, rates run from 7.65% to 34% for direct-line heirs, with a progressive multiplier that can push the effective rate higher for larger estates. However, Spain’s autonomous communities have broad powers to modify the national scale, and some of the most popular expat destinations offer significant relief.
Madrid, for example, offers a near-complete bonus for direct-line heirs, effectively reducing ISD to zero for children and spouses of Madrid residents. The Canary Islands take a similar approach. Andalusia, which covers Marbella, the Costa del Sol, and Seville, has also introduced generous regional bonuses in recent years. By contrast, some other regions have historically been less favourable, though the landscape has shifted considerably since a 2021 Supreme Court ruling required that non-resident heirs be entitled to the same regional bonuses as resident heirs, a significant change that levelled the playing field.
The practical lesson for British expats: where you live in Spain matters to how your estate will be taxed under Spanish law, and where your heirs live matters too. A London-based child inheriting from a parent in Marbella is now entitled to the Andalusian regional bonus, not the less favourable national scale that would have applied before 2021.
The UK Inheritance Tax Tail: Why It Does Not Stop at the Border
Here is the part that catches most British expats in Spain off guard. Even if you have been a Spanish tax resident for years, if you remain UK-domiciled under HMRC’s rules, your entire worldwide estate (your Spanish property, your Spanish bank accounts, your investments wherever they are held) is exposed to UK inheritance tax at 40% above the nil-rate band of £325,000.
Domicile is not the same as tax residence. It is a deeper concept, rooted in where you consider your permanent home to be, and for most British nationals, HMRC treats domicile of origin as the UK. Changing domicile requires demonstrating a genuine and settled intention never to return to the UK, a standard that the vast majority of British expats in Spain (who often retain family, property, and emotional ties to the UK) do not meet. Many have lived in Spain for a decade or more whilst remaining UK-domiciled in HMRC’s view.
From April 2025, the UK introduced a residency-based IHT test for non-UK assets. Under the new rules, once you have been non-UK resident for ten consecutive tax years, your non-UK assets begin to phase out of UK IHT exposure. This is a genuinely significant reform, and for long-term British residents in Spain it creates a planning horizon worth understanding. But for the majority of British expats (particularly those who arrived in the last five to eight years), UK IHT on worldwide assets remains fully in scope.
The result is that many British families in Spain face a double inheritance tax exposure: Spanish ISD on Spanish-situs assets (subject to regional relief), and UK IHT at 40% on the worldwide estate above the nil-rate band. These two charges do not simply cancel each other out; they operate in parallel, with limited credit between them in many cases.
The Named Beneficiary Route and What It Achieves
A portfolio bond, an international investment-linked insurance policy written out of a jurisdiction such as the Isle of Man or Guernsey, is one of the few structures that addresses elements of both tax systems through a single mechanism.
A portfolio bond is, in legal terms, a life assurance contract. Like any life insurance policy, it allows the policyholder to nominate beneficiaries who receive the policy proceeds directly on death, outside the estate and outside the probate process. Under Spanish law, life insurance proceeds paid to named beneficiaries are generally treated separately from the rest of the estate for succession purposes; they pass directly to the beneficiaries rather than going through the testamentary process. This means the policy value bypasses Spanish probate (and the potential delays and costs that come with it), without needing to navigate the regional ISD patchwork on that portion of the estate.
For the UK IHT dimension, the picture is more nuanced. The policy value, if held directly by the policyholder, remains part of the UK estate for IHT assessment if the policyholder is UK-domiciled. However, when the policy is held within an appropriate trust structure, the proceeds can in many circumstances be arranged to fall outside the taxable estate for UK IHT purposes. This is well-established planning that UK IFAs and cross-border advisers have used for decades, but it requires proper structuring from the outset, not retrospective arrangement.
Portability: Because Spain Is Rarely the Last Move
Many British expats in Spain have not fully decided that Spain is where they will spend the rest of their lives. Some will move to Portugal, which has attracted significant numbers of British residents since the end of the NHR regime and the introduction of its replacement incentive for new residents. Some will return to the UK. Others will move further afield.
A portfolio bond written out of the Isle of Man or Guernsey is designed to remain in force through these moves. The underlying investment portfolio continues inside the wrapper, the named beneficiary designation travels with the structure, and the policy does not need to be unwound and rebuilt each time the policyholder changes jurisdiction. Providers such as RL360, Hansard, Friends Provident International, and Utmost International all offer structures with this portability, but the terms of the contract, the cost model, and the flexibility of the investment platform vary considerably between them.
If you are currently in Spain, have been presented with a product illustration, or are simply trying to understand whether the structure your IFA is recommending is the right one for your circumstances, it is worth taking an independent view before you commit. Request a free consultation here