Replies to queries - Spanish apartment

Spanish apartment

My client, who was a German national, but who had been resident and ordinarily resident in the UK since 1972, died in late 2004. He and his widow (who is a UK citizen) had jointly purchased an apartment in Spain in 2002 at a cost of £48,000. In his will, my client left all his assets to his widow including his half share of the Spanish apartment. It is estimated that the value of the apartment in 2004 was £80,000.
I would welcome advice from readers with regard to the capital gains and inheritance tax implications for both the UK and, if possible, Spain.
(Query T16,578) — Disraeli.

Whenever one deals with transfers of overseas property, one must be minded of the potential conflict of laws. In this case, we are considering the affairs of an individual who was possibly domiciled in Germany (or perhaps in one of the German Länder), who has nevertheless acquired a deemed domicile somewhere in the United Kingdom by virtue of IHTA 1984, s 267, and who has acquired (and subsequently bequeathed) real property in Spain.
Although we are told that the late client made a will, we are not told under which jurisdiction the will is to take effect. More importantly though, it is possible that the provisions in the will might not be effective in any event as far as the Spanish apartment is concerned. This is because Spanish law does not give individuals a free choice to whom they can make bequests; there is instead a set of 'forced heirship' rules which dictate who is to inherit property within Spanish jurisdiction.
Under international law, the succession of the Spanish property would follow its lex situs (which would in this case be Spanish law) and the forced heirship provisions, if relevant, would then take precedence over any contrary provision in the client's will. It is therefore imperative that Disraeli seeks expert advice from a Spanish lawyer concerning the fate of the client's share in the apartment. The Spanish lawyer should also be able to advise of any exposure to Spanish taxes in relation to the apartment.
In order to avoid this kind of predicament, many UK purchasers acquire Spanish (and French) property through the medium of a company as company shares can be kept outside the forced heirship rules. This can, however, give rise to potential problems under the beneficial accommodation rules in ITEPA 2003. It is assumed that Disraeli's client did not take this precaution.
We are not told when the client was married. Had this been before 1 January 1974, the wife would have acquired the client's domicile and, assuming that the client had retained his German domicile, the wife would remain domiciled outside the UK. Nevertheless, for inheritance tax purposes, the wife would now also be treated as a deemed UK domiciliary under s 267.
As the client and his wife are both treated for inheritance tax as having the same domicile (whether deemed or actual) the client's estate would flow to her free of UK inheritance tax under IHTA 1984, s 18. Even if persons other than the wife will inherit the share of the Spanish apartment, there will be no inheritance tax to pay as it falls comfortably within the nil-rate band (assuming that the client did not make substantial gifts in the seven years before his death). If there are children of the marriage or others that the wife would wish to benefit, it would be appropriate for consideration to be given to a deed of variation so as to use up the nil-rate band.
TCGA 1992, s 62 provides that assets held by the client at death are to be rebased to their market value at that time. The value of the client's share in the apartment would previously have been considered to be £40,000 (i.e. one half of £80,000). However, the recent High Court decision in IR Commissioners v Arkwright [2004] STC 1323 (referring the case to the Lands Tribunal) suggests that a different figure might be more appropriate.  

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