EU moves towards eliminating cross-border IHT problems

Fri 18 Jul 2014

The Confederation Fiscale Europeenne (CFE) (a pan European body representing tax professionals) has published examples of specific examples of cross-border IHT problems encountered by its members.

This continues the process started in December 2011 when the European Commission published a package of recommendations on ways for member states to avoid the incidence of double (or even multiple) taxation and discriminatory tax rates.  Because different member states have different bases for levying taxes on death, ‘inheritance tax’ is defined for these purposes as:

‘Inheritance tax means all taxes levied upon the death of an individual. Some Member States apply inheritance tax on the heirs, so that the taxable event is the enrichment of the heir. Other Member States apply tax (often called estate tax) on the basis of the assets of the person who has died, in which case the taxable event is the transfer of assets.

For the purpose of the measures adopted today, the term inheritance tax is used to mean taxes on both assets and heirs on the occasion of the death of a person.

Inheritance tax is also defined to include taxes on gifts where these are made in anticipation of later inheritances and where they are taxed under the same or similar provisions as inheritances.’

The Commission proposes to follow up the recommendations which have now been made by the CFE and it is now to be hoped that the EU will make progress in tackling the problems of both discrimination and lack of double tax relief in the context of inheritance taxes.

Background  – EU memo December 2011

Discriminatory succession tax rules are illegal

The thrust of this report was that tax laws that discriminate against residents of other member states are contrary to EU law. In the context of inheritance taxes, discrimination can arise where the assets, the deceased or his heirs are located in a different territory.  This is a far greater problem now than in the past, as many more people move about between countries, and also buy property in foreign jurisdictions.  Judging by the examples cited by the CFE  there are particular problems with Spain’s inheritance and gifts tax.

The unfortunate point for UK taxpayers is that our domicile-based system tends to be discriminatory against UK-residents which is not contrary to EU law. There is specific case law authority that rules that extending the scope of inheritance taxes to people who have ceased to be resident is not discriminatory provided it applies equally to all residents and non-residents. The UK’s deemed domicile rule applies IHT to people who are UK-resident which is the opposite of what the EU forbids.

There was no suggestion in the report that the UK’s taxation of UK-domiciles after they have become non-resident (even where they were previously only deemed dom and so their fiscal domicile will have a defined end point, when they have been non-resident for four years out of twenty) is contrary to EU law.

The UK government does not consider that the UK’s IHT is in breach of EU law following changes made in 2011, so in practice a problem arises if a UK resident is disadvantaged by another state’s rules.

No automatic right to double taxation relief

The report highlighted the fact that there is no obligation on any member state to make any sort of allowance for double taxation, whether by credit or deduction, for taxes incurred in another member state.  However, the European Commission recommended ways in which member states could make changes to provide effective double tax relief.