UK Inheritance Tax has changed: Does that impact buying property in Spain?

Recently, the UK government introduced changes to how the inheritance tax (IHT) system works. This angered many people who felt like their inheritance was being diminished.

It can also impact foreign property estates. So, what is inheritance tax, how has it changed, and does it impact buying property in Spain?

Continue reading to find out.

What is Inheritance Tax, and how does it work?

Inheritance tax is a payable tax on the value of a deceased person’s estate. It currently charges at a rate of 40% on the value of an estate above their tax-free allowance.

The ‘estate’ includes the deceased person’s property, money, and possessions. Inheritance tax is usually paid by the executor of the will or the administrator of the estate (if there isn’t a will) out of the deceased person’s estate.

The people inheriting don’t usually pay the tax directly, but the amount received will be reduced by the tax paid from the estate.

What are the current tax rates and thresholds for Inheritance Tax?

The current inheritance tax rates and thresholds, as of April 2025, are:

• Standard Nil-Rate Band: £325,000 per individual.
• Residence Nil-Rate Band: An additional £175,000 when passing a main residence to direct descendants.
• Combined Allowance: Potentially up to £500,000 per person, or £1 million for married couples or civil partners.
• Tax Rate: 40% on the value of the estate above the applicable threshold.
• Reduced Rate: 36% if at least 10% of the estate is left to charity.

These current thresholds have been frozen until at least April 2028.

How is inheritance tax determined? 

The recent changes to IHT have seen a shift from domicile to residency-based taxation. The IHT liability is determined by UK residency status rather than domicile, so long-term residents of the UK, who have lived here for at least 10 of the past 20 years, are subject to IHT on their worldwide assets.

For non-long-term residents, IHT is only applicable to their UK assets.

Are there any changes to agricultural and business property relief?

Yes, there are changes to agricultural and business property relief – but not until April 2026.

Effective April 2026, new rules impact the inheritance of farms and family businesses. There is a 100% relief on agricultural and business property capped at £1 million, and any assets exceeding the £1 million cap are taxed at 20%.

As the tax payment is such a large figure for anything over £1m, the 20% IHT can be paid interest-free over a 10-year period.

These specific changes are designed to address tax avoidance but have raised concerns among farmers and business owners about the potential financial strain they could cause.

Does UK inheritance tax impact Spanish property?

Buying property in Spain doesn’t directly trigger UK inheritance tax, but it can be considered as part of your worldwide estate when you die.

IHT is levied on the worldwide assets of individuals domiciled in the UK – living here for at least 10 of the past 20 years.

If you’re deemed to be UK domiciled at the time of your death, the value of your Spanish property will be included in your estate for inheritance tax purposes.

However, any Spanish Inheritance tax (ISD) paid on the same property could be allowed as a credit against your UK IHT liability, essentially avoiding double taxation. Although there isn’t a specific double taxation agreement between Spain and the UK for IHT.

Speak to Spanish property market experts

If you’re keen on purchasing property on the south coast of Spain, but you’re not sure where or what you want, contact us today, and we can help.

At Bromley Estates Marbella, we’ve got years of experience working on the Costa del Sol, helping people like you find their dream homes abroad.

Whether you’re keen on a holiday home or would like to move to Spain, we can help you find the right property that fits your needs and budget.

Interested? Get in touch with us today by calling +34 952 939 460.