Avoidance of multiple inheritance taxation within Europe
by
Prof. John Tiley
1. COMPARATIVE (DOMESTIC) TAX LAW
1.1. Overview
a. The current system
The current UK system for inheritance tax was introduced in 1986. It builds on earlier
models, estate duty (1894 – 1975) and Capital Transfer Tax or CTT (1975-1986).
Like those earlier models it is an estate tax but, confusingly, is called Inheritance Tax
(IHT).
IHT, like CTT before it, is built on the concept of a transfer of value. A lifetime
‘transfer of value’ occurs if a person makes a disposition which reduces the value of
his estate. Even though they reduce the value of a person’s estate, bad bargains are
declared to be not transfers of value - provided they are genuine.
On death a person is deemed to make a transfer of value equal to the value of his
estate at that time (IHTA 1984 s. 4)
Transfers are commonly divided into ‘potentially exempt’ ‘exempt’and ‘immediately
chargeable’ transfers.
Potentially exempt transfer (or PETs) are those made in the last seven years. PETs are
not charged when made but are ignored on the basis that it is best to wait and see
whether the donor will survive seven years. This approach is taken not only to simple
gifts but also to gifts into a trust where a beneficiary takes an interest in possession.
So if the donor makes a gift and survives seven years there will be no IHT.
Exempt transfers include those to a spouse or to charity.
There are very few examples today of an immediately chargeable transfer. The most
common is a transfer to a discretionary trust although even here there are exceptions
e.g. where the transfer is into an accumulation and maintenance settlement.
IHT uses a principle of cumulation over a seven year period. So if a person makes two
immediately chargeable transfers the second will be added to the first to find the right
amount of tax.
However the first will be cease to be cumulated after seven years; hence if there is a
seven year gap between the two transfers the second will not by cumulated with the
first as the donor’s cumulative total will have reverted to zero once the seven years
had passed. This 7 year cumulation period means what it says; it not the seven years
before death
Estate duty (1894-1975) charged property pasing on death but reached back to certain
events before death e.g. gifts within a certain period of death. That period was at first
3 months but over the year was extended to seven years. Capital Transfer Tax (197586) was an integrated gift and death tax with cumulation over the donr’s lifetime. The
teeth of CTT were withdrawn in stages; e.g. with a 10 year cumulation period
substituted for lifetime and with major changes in the rules for discretionary trusts.
Eventually CTT was turned into IHT by reducing the cumulation period to seven
years and introducing PETS. These historical matters are relevant to the double tax
treaties below.
The tax is charged on individuals and trusts - but not on companies. However a
transfer of value by a close company can be treated as a transfer by its participators.
As far as CGT is concerned death brings an acquisition at the value at death; however
there is no disposal at market value so we have a ‘step-up’ on death. In other words
only IHT – and not CGT is due on death. From 1965 to 1971 both taxes applied.
b. The UK tax is a donor based estate tax on the estate as a whole rather than the amount
of property received by each particular heir.
c. IHT is charged by the Inheritance Tax Act 1984. This was originally the Capital
Transfer Tax Act 1984 but its title was altered by Finance Act 1986 s. 100 (1)(a). In
accordance with UK practice the legislation is changed almost every year. Some of
these changes are modifications to the 1984 Act itself; others are free standing e.g. FA
1992 s. 125 (disclosure of information to tax authorities in other member states). As a
result one relies on the commercial publishers to give one the legislation each year
e.g. Butterworths Orange Tax Handbook 1999-2000.
1.2. Criteria for tax liability
a. The IHT criteria are the same as for CTT and for estate duty – even if the concepts
are slightly different.
On death a person’s estate does not include ‘excluded property’ (s. 5 (1)). Property
situated outside the UK is excluded property if the person beneficially entitled to it is
an individual domiciled outside the UK (s. 6(1).
The situation for lifetime transfers is more complex. S. 3 (2) states that no account is
to be taken of the value of excluded property which ceases to form part of a person’s
estate. From this it follows that IHT may become due if a disposition of excluded
property causes a fall in the value of the estate which is greater than that of the
excluded property.
There are no special IHT rules for the situs of assets. The normal conflict of laws
rules apply save where a double tax treaty provides a different answer.
Two other categories as excluded property are a) certain British Government
securities so long as the securities are in the beneficial ownership of persons neither
domiciled nor ordinarily resident in the UK, and b) certain forms of Government
introduced, or regulated, savings to which a person domiciled in the Channel Islands
or the Isle of Man is beneficially entitled.
There is a similar exclusion (but only on death) for a non-sterling bank account held
by someone neither resident nor domiciled in the UK immediately before death. (s.
157)
The visiting forces rules treat emoluments and UK-situate tangible movable property
of members of such forces as excluded property so long as those members are not
British citizens (or citizens of British Dependent Territories or British Overseas
Citizens).
Settled property. Property comprised in a settlement is excluded property if situate
outside the UK and the settlor was not domiciled in the UK at the time the settlement
was made. There special rules for exempt government securities comprised are
adapted for settlements; here one looks to the foreign domicile of the beneficiaries
A reversionary interest in settled property is normally excluded property (whatever
the domicile of the person beneficially entitled to it).
b.
Domicile
The normal conflict of laws rules apply to determine domicile. Separate rules may
apply by treaty.
For civilians unused to UK law this concept looks very strange. Persons are
domiciled1 where they have or are deemed by law to have their permanent home.
Everyone must have a domicile; but cannot have more than one domicile. For IHT
the relevant domicile is usually that of the donor.
For a recent example, see Anderson (Anderson’s Executors) v IRC
(1998]STC(SCD) 43; see also Re Clore (No 2), Official Solicitor v Clore [1984] STC
609. On the importance of domicile in tax matters see the Law Commission’s Joint
Report on Domicile 1987 (Cm 200), but note subsequent changes especially in
relation to Schedule E.
1
‘Domicile of origin’ is the domicile which the law attributes to every individual at
birth. If the child is legitimate, this is the domicile of the father at the date of the
child’s birth; if the child is illegitimate, the domicile of the mother 2
‘Domicile of choice’ is the domicile which people may acquire by leaving the country
of their domicile of origin and taking up residence in another country with the
intention of making their permanent home there. However, until there is both the
intention to change the domicile and also the establishment of residence in the new
territory, the domicile of origin remains. Mere length of stay in a country is not
sufficient to establish a domicile of choice in that country. A domicile of choice is
acquired by the combination of residence and intention of permanent or indefinite
residence.3 Thus, civil servants and missionaries whose domicile or origin was in
one of the constituent countries of the United Kingdom and who reside abroad for
vocational or business reasons even for the greater part of their lives, retain that
domicile unless they have abandoned the intention of ultimately returning to live in
the country of their domicile of origin and have formed the definite settled intention
of taking up permanent residence in the particular country in which they reside.
Change of Domicile. The domicile of origin continues until a domicile of choice is
acquired. On the other hand, a domicile of choice is lost by departure from the
country of such domicile without the intention of returning there to live; in that event
the domicile of origin revives unless and until a new domicile of choice is acquired.4
The onus of proof of abandonment of the domicile of origin is upon those who seek to
establish the acquisition of a domicile of choice, and very strong evidence is required
for this purpose.5
Special rules apply for married women and children. The extent to which these are
vulnerable to challenge on the basis of human rights legislation relating to
discrimination has not been explored. As a result of the Domicile and Matrimonial
Proceedings Act 1973, which came into force on 1 January 1974 the domicile of a
married woman is no longer the same as her husband’s by virtue only of marriage but
is ascertained by reference to the same factors as in the case of any other individual
capable of having an independent domicile. If she was already married on 1 January
1974 and had her husband’s domicile by dependence, she is treated as retaining that
domicile (as a domicile of choice if not also her domicile of origin) unless and until it
is changed by acquisition or revival of another domicile.
Normally the domicile of a legitimate child changes automatically with that of the
father, although the position may be different where the parents are deceased,
separated or divorced. An individual is capable of having an independent domicile
when he or she attains the age of sixteen or marries under that age.
2
Udny v Udny [1869] LR 1 Sc & Div 441 at 457.
On Nationality as a factor see Bheekhun v Williams [1999] 2 FLR 229 noted Stibbard 1999 Private
Client Business 360
4
see Bell v Kennedy [1868] LR 1 Sc & Div 307
5
e.g. F and F v IRC [2000] STC (SCD) 1
3
For IHT the normal domicile rules are widened in two ways to cover a person who (1)
was domiciled in the UK within the three years immediately preceding the relevant
time, or (2) has been resident in the UK in not less than 17 of the 20 years of
assessment ending with the year of assessment in which the relevant time falls.
The normal exemption for transfers to a spouse is restricted to £55,000 where the
donor is domiciled in the UK and the recipient is not. This sum has not been changed
since 1982.
c.
The effect of the definition of excluded property is that a person who is not domiciled,
or not deemed domiciled, in the UK is only taxable on property situated in the UK.
Persons domiciled, or deemed domiciled, in the UK are taxable in respect of all assets
wherever situated. Persons not so domiciled are only taxable in respect of assets
situated in the UK
1.3. Tax avoidance
The UK tax system has no general anti-avoidance rule got IHT and little general antiavoidance tax jurisprudence. Some judges are currently involved in trying to develop a more
purposive approach to statutes but quite what effect this will have apart from the way in
which arguments are put is as yet uncertain. In 1999 the House of Lords had no difficulty in
upholding a tax avoidance scheme in Ingram v IRC [1999] STC 37. The House had upheld a
more complex scheme in a less clear cut way in Fitzwilliam v IRC [1993] STC 502.
The legislation includes an ‘associated operations’ provision IHTA s. 268 under which
transfers by such means are treated as one and as made at the time of the last. However while
the words of this provision are potentially wide ranging the Minister introducing the
legislation explained that it would not be used in various situations. As a result it has been
little used.
Gifts made within seven years of death are taxed as potentially exempt transfers.
‘Immediately chargeable’ transfers are charged whenever made.
Gifts whenever made are taxed on death if they fall foul of certain rules which apply where
the donor reserves some benefit out of the property given away (FA 1986 s. 102)
1.4. Valuation and exclusions (maximum of 200 words)
a.
The assets are valued at the time of death. Generally a market value rule is used.
b.
No asset are excluded as such
Certain business assets qualify for 100% relief and so do not enter the cumulative
total at all. These are 1) a business, an interest in a business, 2) a controlling interest
in an unquoted company, and 3) any unquoted shares. 2) is wider than 3) in that the
100% relief extends also to securities other than shares. Property such as land or
machinery used by the company but held outside the company qualifies for 50%
relief.
Agricultural land attracts similar reliefs depending on whether it is occupied by a
tenant or by the owner.
There are rules for the deferral of tax on various assets e.g. timber and works of art etc
of a suitable standard. These deferral rules normally apply until the assets are sold or
otherwise realised and can be used on more than one occasion.
1.5. Rates and tax-free base amounts (reliefs)
a.
The system applies a uniform rate of tax on death at 40% but with a threshold that
is currently set at £234,000. Once the cumulative total passes this point IHT is
chargeable at 40%.
The charge on an immediately-chargeable transfer (e.g. to a discretionary trust) is
one half the death rates – i.e. 20%. It applies at the same £234,000 point
If the donor made a potentially exempt transfer, e.g. an outright gift, but donor
dies within seven years) the death rate of tax at 40% applies but with a
progressive discount for every year over three. If the donor made an immediately
chargeable transfer and died within seven years tax is due at the death rate of 40%
in the same way but with a credit for the tax already paid. Whichever rate of tax is
applicable the amount of tax will be the same whatever the relationship between
the donor and the heir, i.e. the amount of tax will be the same for an estate
whether it is left to one child or divided between three or left to a stranger; the
only exception is a gift to a spouse.
Where the lifetime transfer is chargeable e.g. on a transfer to a discretionary trust,
the rate of tax is 20%. Where the donor pays the tax, the gift is treated as a net gift
and 20% rate is applied to the grossed up amount. So a chargeable transfer of
£80,000 gives rise to tax of £20,000 not £16,000.
A gift with reservation of benefit is treated as made on death. It is therefore valued
at the tie of death and cannot benefit from the discounted rate of tax. If the benefit
ends before the death these rules apply as at the date of the ending and not at the
date of death and so the discount can apply. If it ends more than seven years
before the death there is no charge to IHT.
These are fewer and lower than those in force in the days of Estate duty or CTT.
In 1980 there were 11 brackets, apart from the nil rate band the rates increased at
5% intervals from 30% to 75%.
b.
Favoured Beneficiaries There is an exemption for a transfer to a spouse.
There is also a special rule exempting for lifetime transfers which are dispositions
for the maintenance of the family.
c.
Community of Property - No
1.6. Striking features
Where lifetime transfers are concerned IHT uses the interesting idea of ‘loss to the
transferor’s estate’
This is used both to decide whether any tax is due and if so how much to tax. We do not
usually worry about the extent of benefit to the transferee. This was a 1975 change from the
old estate duty rules and was designed to avoid many problems of valuation e.g. valuing the
‘benefit’ of a private education.
There are also generous but sensible rules under which the beneficiaries may rearrange what
the deceased has done within two years of the death. Tax is then charged on the estate as
varied and not as the deceased left it.
2. DOUBLE TAXATION RELIEF
2.1. Unilateral relief
Unilateral credit relief for foreign tax. This is available where the tax charged on a disposition
or event is attributable to the value of property, and (1) the foreign tax is of similar to IHT (or
its predecessor capital transfer tax) or is chargeable on or by reference to death or gifts inter
vivos, and (2) the UK tax charged by reference to the same disposition or other event is also
attributable to the value of that property.
The rule for unilateral credit relief are the same as for treaty credit relief. So if the property is
situated in that overseas territory and not in the UK full credit is available. A formula
reduction applies if the property is situated neither in the UK nor in the overseas territory, or
in both of them. Here the credit is calculated in accordance with the following formula—
A
 C where A is the amount of the UK tax, B is the overseas tax and C is whichever of
AB
A and B is the smaller. The formula is adapted where tax is imposed in two or more overseas
territories in respect of property and that property is situated neither in the United Kingdom
nor in any of those territories, or is situated both in the UK and in each of those territories.
Credit may only be claimed for tax properly chargeable and actually paid. Where both
unilateral and treaty relief are available relief is given under whichever rule gives the greater
relief; this was a 1975 change from the older rules which gave unilateral relief only where
there was no treaty relief.
2.2. Tax Treaties -- Overview
The first of the UK’s double tax treaties was made with the USA in 1945. UK books claim
that this was used as the model for other treaties until the 1966 OECD Model was agreed.
The date of entry into force varies according to the type of treaty. A treaty with a nonCommonwealth country usually comes into force as from the exchange of instruments of
ratification; a treaty with a Commonwealth country usually uses the day on which the last of
all things necessary to be done in th two countries has been done. Sometimes the treaty has
retroactive effect; retroactivity may be a matter of election.
In looking at these dates one must remember that estate duty persisted until 1975, CTT from
1975 to 1986 and IHT since 1986. The estate duty treaties try to resolve double tax problems
by a mixture of situs rules and credit relief. Treaties designed for CTT (and IHT) resolve
problems of dual domicile by creating rules for a treaty domicile and giving primary rights to
the state of treaty domicile and secondary rights to the other.
List of UK Treaties
CANADA Convention of 5 June 1946
1946/1884
Entered into force
6.11.1946
Terminated, in relation to deaths after 30 September 1978, by notice given by the UK on 1
August 1978. The Convention was of limited effect after the abolition of estate duty in
Canada.
FRANCE Convention of 21 June 1963
Affects estates as from 21 June 1963
1963/1319
30.6.1964
GERMANY A convention covering taxes on estates, gifts and inheritances is under
negotiation
INDIA Agreement of 3 April 1956
1956/998
30.6.1956
For certain estates had retroactive effect to 15 October 1953.
The Agreement is of limited effect, following the abolition of estate duty in India.
Discussions about a Protocol began in November 1980; progress was reported in October
1984, but the talks were discontinued.
IRELAND Convention of 7 December 1977
1978/1107
2.10.78
Before 1977 double taxation matters with Ireland were dealt with by express legislation –
Irish Free State Act (Consequential Provisions) Act 1922, s. 5 revoked by FA 1975 Sch 13.
ITALY Convention of 15 February 1966
1968/304
9.2.68
A new Convention, covering taxes on the estates of deceased persons and on gifts, was
agreed at official level in February 1988, but was not proceeded with.
NETHERLANDS Convention of 15 October 1948 1950/1197 21.7.1950
Had further limited effect down to 27.3.81
Convention of 11 December 1979
1980/706
16.6.80
Amending Protocol of 7 September 1995
1996/730
3.6.96
PAKISTAN Agreement of 8 June 1957
1957/1522
24.9.57
Had some retroactive effect to 1951; the Agreement is of limited effect, following the
abolition of estate duty in Pakistan.
SOUTH AFRICA Agreement of 14 October 1946 1947/314
Amending Agreement of 22 December 1954 1955/424
Convention of 31 July 1978
1979/576
6.5.79
1978 Convention applied retroactively to 1.1.78; old agreement had effect until 6.5.79 if
more generous and for some events until 27.3.81.
SWEDEN Convention of 14 October 1964
Convention of 8 October 1980
Amending Protocol of 21 December 1987
1965/599
1981/840
1989/986
24.3.65
19.6.81
14.7.89
SWITZERLAND Convention of 12 June 1956
Convention of 17 December 1993
Protocol of 17 December 1993
1957/426
1994/3214
1994/3214
15.3.57
6.3.95
6.3.95
UNITED STATES OF AMERICA Convention of 16 April 1945 1946/1351 2.8.46.
Convention of 19 October 1978
1979/1454
11.11.79
All the pre-1966 treaties deviate from the OECD model as the model did not then exist!
The old (1957) Swiss treaty contained situs rules but did not provide credit relief
Apart from the old estate duty treaties and Ireland (which is a special case) the UK treaties
allow the state of situs to charge. If the person has a treaty domicile in the other state the UK
gives up its full situs charges except where it retains a secondary right – which is usually
where the person has recently given up a UK domicile; this matter is usually of most
relevance to UK nationals.
Dual Residence/Domicile; the UK/US treaty uses a centre of vital interests rule where no
permanent home in either state before going on to habitual abode
Subsidiary right to tax on basis of nationality when other state has treaty domicile (para 71)
Such clauses are found in the treaties with the Netherlands, South Africa, Sweden (in effect)
and the USA. There is no such clause in the treaty with Ireland but then Ireland does not try
to tax on this basis. All use the less-than-7-out-of-the-previous-10-years rule; Netherlands
has an extra test in that the rule does not apply if the person about intends to remain in the
State of treaty domicile permanently.
Situs charge There is no restriction in the Ireland treaty. In the other treaties the situs charge
is restricted to immovables, permanent establishments and ships and aircraft but Sweden does
not mention immovables nor the US ships and aircraft.
Where there is a conflict over situs the treaties display a variety of solutions
Spouse relief. Exemption for certain non-community property is found in the treaties for
Netherlands, Sweden and USA
The new Swiss treaty is unusual. It follows the traditional model where the person concerned
had only one fiscal domicile. However, where the person concerned had a dual domicile it is
the state of situs rather than that of the treaty domicile which has the primary right to tax.6
The Swiss treaty recognises that it recognises in that in dual domicile cases (as opposed to
single domicile cases) there is a stronger connection with the loser state so that the UK gives
up no situs charges; this is in contrast to the single domicile cases where the UK gives up a
situs charge on everything except shares.
2.3. OECD Model-conform?
Pre 1966 Conventions
CANADA Convention of 5 June 1946
FRANCE Convention of 21 June 1963
INDIA Agreement of 3 April 1956
ITALY Convention of 15 February 1966
NETHERLANDS Convention of 15 October 1948
PAKISTAN Agreement of 8 June 1957
SOUTH AFRICA Agreement of 14 October 1946
SWEDEN Convention of 14 October 1964 1965/599
SWITZERLAND Convention of 12 June 1956 1957/426
UNITED STATES OF AMERICA Convention of 16 April 1945
6
See Note [1995] BTR p.12 and Avery Jones [1997] Private Client Business 2
Post 1977 but pre 1983
IRELAND Convention of 7 December 1977
ITALY Convention of 15 February 1966
NETHERLANDS Convention of 11 December 1979
PAKISTAN Agreement of 8 June 1957 1957/1522
SOUTH AFRICA Convention of 31 July 1978
SWEDEN Convention of 8 October 1980 1981/840
UNITED STATES OF AMERICA Convention of 19 October 1978
Post 1983 Conventions
SWEDEN Convention of 13 June 1989
SWITZERLAND Convention of 17 December 1993
(NETHERLANDS Protocol to 1979 Convention: 13 March 1996)
2.4. Method to avoid double taxation
Please describe the method which is used in these treaties to avoid double taxation, such as
exemption method (with or without the reservation of the progression), (ordinary) credit
method.
Usually Credit
Exemption (or part exemption) is also used in Netherlands (art 12) Sweden (art 11- spouse
transfers) US (art 8 (2)- spouses))
3. EC LAW
No domestic UK provision is expressly formulated in terms of nationality.
The only change we have made which is attributable to EC/EU influence is that for tax
purposes an individual’s registration on the UK electoral roll as an overseas voter is to be
disregarded in determining domicile.7 This rule can be disregarded if the individual so
wishes.
Free movement within the EU.
Our rule which treats a person who has been resident here for 17 of the last 20 years as still
domiciled here may be seen to inhibit free movement but should be justifiable by reference to
the rule of reason.
7
FA 1996, s.200.
Free movement of capital.
Our rule in s. 157 on non-residents’ bank accounts looks to be in breach of the freedom of
movement of capital in that s. 157 does not apply if the account is in sterling.
On § 71 (Commentary on the provisions of Article 9B) of the 1982 OECD Model Estate Tax
Convention see treaties with Netherlands, South Africa, Sweden and USA
4. CASE
Individual X who
-- is domiciled in country A (`domicile´ to be understood in its Anglo-saxon meaning)
-- is a national of country B that was left by the individual within the last 10 years
-- is a resident of country C
-- has situs property in country D
-- deceases during a holiday in country E
Would your country tax if it is in the position of :
-- country A ? Yes if domiciled in UK or deemed domiciled in UK
-- country B ? No; if there is a charge it is not on this basis but on the basis of situs.
-- country C ? No; if there is a charge it is not on this basis but on the basis of situs.
-- country D ? Yes – wherever domiciled
-- country E ? No; if there is a charge it is not on this basis but on the basis of situs.
In each case the answer would be ‘subject to any relevant treaty’