The asserted position under European Union law is that Member States are free to choose the tax systems they consider most appropriate and which accord to their fiscal preferences. As with everything European, there is always a caveat.

Belgium was referred to the European Court of Justice (ECJ) over its "discriminatory" inheritance tax rules. In 2012 the Belgian Government failed to respond to a request that it amend the law in question; Olivier Halley, Julie Halley and Marie Halley v The Belgian State (C-132/10).

The European Commission made the decision after reviewing Walloon Region's tax rules. The legislation allowed individuals to choose between several share quotations, to determine the taxable base for inheritance tax purposes. This option was only available for shares listed on a Belgian stock exchange. Shares listed on stock exchanges in other European Union (EU) member states or European Economic Area (EEA) states can only be valued at the stock market price at the time of death.

The Commission concluded the absence of overall choice was discriminatory and restricted the free movement of capital under Article 63 of TFEU (Treaty on the Functioning of the European Union). The purport of the argument was Belgian residents may be discouraged from investing in foreign shares, for fear of heavier taxation. The caveat which the government fell foul of was that which states "in the Internal Market there should be an elimination of obstacles (including those relating to tax) to all forms of cross-border economic activity". Should Belgium fail to comply, it may again be referred to the ECJ.

The Isle of Man is not a member of the EU but enjoys a limited relationship with it. Protocol 3 states which areas of legislation is directly applicable in the Isle of Man. Thus, the scope and applicability of EU decisions is limited. However, the following demonstrates that non domiciled persons, for example, Manx domiciled may nonetheless be affected. The United Kingdom has fared little better than the Belgians as UK tax legislation provided transfers between domiciled spouses or civil partners were exempt from inheritance tax. However, transfers between domiciled and non-domiciled spouses or civil partners were not. Furthermore, the rules on the nil-rate band applicable to subsequent transfers where there is a domiciled and non-domiciled spouse differed such that it could result in higher taxation. The difference in tax treatment of transfers between domiciled and non-domiciled spouses was considered of a discriminatory nature and contrary to EU rules (Article 18 TFEU).

The UK government in consequence of European scrutiny passed the Finance Bill 2013. Its effect was to increase the IHT exempt amount a UK domiciled individual can transfer to their non-domiciled UK spouse or civil partner and it allowed individuals who are domiciled outside the UK and who have a UK domiciled spouse or civil partner to elect to be treated as UK domiciled for IHT purposes. It is a popular misconception the Isle of Man is part of the UK, it is not. Where one party to a marriage is Manx and the other is from the UK it is important to have Wills which state the alteration of the domicile of origin; professional advice should always be sought respect of this, as it should in the event of death of either spouse. Additionally, the limit on the amount able to be transferred from a spouse to a non domiciled spouse or civil partner has been increased from £55,000 to the level of the nil rate band i.e. £325,000 increasing to £329,000 for 2015/16. UK domiciled spouses can transfer any amount inter se without triggering inheritance tax therefore the UK legislation has taken account of the possibility this may be discriminatory by allowing the non-domiciled spouse to benefit from an unlimited transfer amount if they elect to be considered as UK domiciled. However, before making such an election one should consider that in so doing, all of the assets of the deceased are then bought within UK inheritance tax which may of itself be disadvantageous if the inheritance tax regime applicable to the non-domiciled spouse is more favourable than that in the UK.

Specific tax and legal advice should be taken in relation to each individual circumstance.

About the author: Ilsa Reeves is an Isle of Man Advocate and an English Solicitor who specialises in Wills, Probate and Estates Administration

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