UK inheritance tax reform: lessons from Europe

7 January 2021 | Applicable law: England and Wales

In our first and second installment reviewing the reports on the IHT system by the Office of Tax Simplification (the 'OTS') and the All-Party Parliamentary Group on Inheritance & Intergenerational Fairness, (the 'APPG') we focused on the reforms particularly relevant to private individuals and their impact on the life insurance and pensions industries. In considering a possible reform of the IHT system, it would also be sensible to take a look at what other countries do. In this final Part 3 of our series, we will consider whether European equivalents of the IHT system can provide further inspiration for achieving change and give our concluding comments on a possible road to reform.

Looking across the Channel

Most European countries have adopted the so called 'capital accessions' tax system. This seeks to tax the recipient of the transfer of wealth, whether this is a lifetime transfer or a transfer on death, with the benefit of a cumulative lifelong allowance. As most civil law countries have forced heirship compelling the deceased to leave a proportion of their estate on death to certain individuals (usually spouses, children and grandchildren), lower tax rates are chargeable on donees when they are closer family members. With donee-based taxes, the rate of tax is calculated based on how much wealth the donee receives rather than based on the value of the donor's estate. The donee is often provided with a personal tax free allowance which in most cases is a cumulative lifetime allowance: once this is exceeded the donee is responsible for paying the tax.

As for the connecting factors based on where to charge IHT, most European countries use either the situs of the assets or the residence of the donor (and more rarely the residence of the donee) as the connecting factor to charge succession or donation tax.

Residence versus domicile

As part of the UK IHT review, suggestions have been made that the current system which charges UK IHT based on the domicile (rather than residence) be reconsidered. At present, a UK resident non UK domiciled/deemed domiciled donor who passes non UK assets is outside the scope of IHT. Furthermore, any non UK assets held within a trust created before the settlor became UK deemed domiciled will remain outside the scope of IHT (even if the settlor were to die UK resident and domiciled).

The concept of domicile is often regarded with uncertainty as it very much depends on an intention to settle permanently and indefinitely in one country rather than another. This is often very difficult to establish conclusively, especially after the individual is dead. The APPG has recommended that domicile as the connecting factor is replaced by UK residence (which is much easier to determine) and that UK IHT be chargeable on a worldwide basis as soon as an individual has been UK tax resident for more than 10 out of the last 15 years (in effect bringing forward the moment a foreign individual becomes subject to UK IHT as compared to current rules).

The OTS does not touch on this issue and therefore makes no recommendations in this respect. It is our view that any wholesale review of the UK's IHT system would likely have to consider the issue of domicile to achieve further simplicity and clarity in how IHT should work.


A reform of the IHT system would undoubtedly be very welcome, though there will be many who would like to see abolition as the result of the reform, whilst others would prefer an approach to that suggested by the OTS and the APPG. Whether the UK will remain loyal to the present system (which taxes the deceased's estate with the executor being primarily responsible for the tax), perhaps subject to a number of incremental changes as suggested by the OTS or more radical reforms in line with the APPG's recommendations or would consider adopting the European continental approach of capital accessions is still very much up for discussion and whilst it is clearly on the government's radar, it is also likely to be low down the list of the priorities at the moment given the need to raise revenue quickly. It is certain the OTS' approach would achieve change more quickly than the APPG's, with the latter's complete rethinking of the system requiring many years to implement.

Consideration will need to be given to the foundation features of the IHT system such as whether to use domicile or residency, how to deal with trusts and foundations and the interaction with other wealth based taxes. It goes without saying that, the adoption of a donee-based system would be the most radical approach and will require significant administrative and compliance costs which may make it unattractive at this point in time, as well as requiring a major attitude change by the policymakers.

Whatever the outcome may be, although we are still a long way to any substantive reform becoming law these reviews show that it is certainly being looked at and we will be keeping a close eye on how matters progress.

Please click here to read Part 1 – 'IHT: rates, reliefs and responsibilities' and here to read Part 2 – 'IHT: a matter of life (policies) and death'. If you have any questions about this content, please get in contact with your usual Withers contacts, or one of the authors below.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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