We are at that time of year where stargazers try to predict what reforms the UK Government will intr...
We are at that time of year where stargazers try to predict what reforms the UK Government will introduce to the tax system. Once again, inheritance tax (IHT) looms large in the crystal ball. The biggest surprise is that no reform been forthcoming from a Government that so publicly expressed its desire for changes to IHT when they were in Opposition.
If the Government does decide to radically reform IHT, what sort of regime would they come up with to replace the current regime? To get an idea, we should look at how the EU taxes inheritances. Borrowing ideas from other EU countries would not be unusual - witness the radical changes introduced to CGT in the UK in recent years. Taper relief, the method of reducing overall taxable gains in relation to how long an asset has been held, is a common system in several EU nations. There are also common themes in relation to inheritance.
The UK is unique in the EU in that it taxes worldwide estates based on the domicile of the donor. This creates a system whereby some individuals can be resident in the UK and escape IHT on non-UK assets, whereas others can be non-UK resident for many years and still find that their non-UK estates are subject to IHT.
All other EU countries only tax inheritances left or received by individuals resident in a particular state. The only other EU nation to levy IHT based on domicile, Ireland, has now changed to a system based on residency. However, some jurisdictions operate 'deeming' provisions for IHT purposes to stop their citizens becoming resident elsewhere to avoid IHT. For example, a citizen of the Netherlands who dies within 10 years of leaving there is deemed to be resident for IHT purposes. Likewise, receipts of an inheritance by a Swedish resident will be taxable if the donor is a Swedish citizen (or married to one) and had been resident in Sweden within 10 years of death.
The UK is also out of line in relation to who is chargeable on an inheritance. There, it is the loss to a deceased's estate that is taxable. In other EU countries, however, it is the amount actually received by any particular beneficiary that is taxable. Each beneficiary then usually has their own 'nil rate band' below which no tax is payable. The value of this band usually depends on the relationship between the donor and the donee, as the following example in relation to Spain illustrates: Relationship to donorDeduction
Natural or adopted descendantPt2.602m + Pt650,000 for under 21each year under 21 up to a max of Pt 7.806m. Natural or adopted descendantPt 2.6m over 21 years, spouse, ascendant. OtherNil. Most lifetime gifts in the UK are potentially exempt, free of tax providing the donor survives for at least seven years after making the gift. In most EU countries, IHT is chargeable immediately on any gifts made during the donor's lifetime, again generally subject to the same rates and deductions as transfers on death.
Although not directly related to IHT, wealth tax is an annual charge to tax based on the net value of an individual's total assets. Several EU countries still levy this tax, which ranges between 0.5% and 2% of total wealth exceeding certain thresholds.
In general, other EU citizens live under a harsher IHT regime than UK citizens with potentially higher rates and where not all interspousal transfers are tax exempt. It remains to be seen whether the UK Government will move its system more in line with other EU countries, especially with a general election only around the corner.
Brendan Harper is technical services consultant at Royal & Sun Alliance International Financial Services, Isle of Man
This article contains general information only and is not intended to be taken as specific investment or tax advice. Further information would be required.
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