With Mario Compagnoni of Investing in Uk, we addressed the topic of inheritance tax. The article will discuss the differences in terms of the application of taxes and deductibles and the agreed instruments for asset protection and succession.
What is Inheritance Tax
Inheritance Tax, commonly called IHT, is the tax that is levied on the estate of a deceased person.
It is administered by HM Revenue and Customs and is generally applied at a rate of 40% on the portion of assets exceeding certain exemption thresholds.
Not all wealth is automatically taxed. The system is based on specific thresholds and rules that, if understood correctly, allow for effective planning.
The Nil Rate Band
Each individual has an exempt threshold called the Nil Rate Band.
It currently stands at £325,000.
This means that the first £325,000 of the estate is taxed at 0%.
In the case of spouses or civil partners, the unused part of the Nil Rate Band can be transferred to the surviving spouse. In practice, a couple can protect up to £650,000 before Inheritance Tax applies.
It is important to point out that this threshold has been frozen for several years. The lack of adjustment for inflation leads to a progressive increase in the number of taxable assets.
The Residence Nil Rate Band
An additional allowance is added to this threshold when the main dwelling is left to direct descendants.
This is the Residence Nil Rate Band, currently £175,000 per individual.
Combining the two thresholds, a single individual can potentially transfer up to £500,000 free of IHT. For a couple, the total can go up to £1 million, subject to certain conditions.
However, this relief is progressively reduced for assets over £2 million. The 'tapering' mechanism can have a significant impact in cases of high wealth. It reduces by £1 for every £2.
The 40 per cent rate
Once the exemption thresholds are applied, the excess wealth is generally taxed at 40%.
There is a reduced rate at 36% if at least 10% of the net assets are allocated to charities.
The tax must be paid, in most cases, within six months of death. Delays in payment result in interest.
Living donations and the seven-year rule
Inheritance Tax does not only apply at the time of death.
The British system also regulates donations made during lifetime.
Most donations to individuals fall under the seven-year rule. If the donor survives for seven years from the date of the donation, the amount transferred becomes exempt from IHT.
If death occurs within seven years, the tax may be payable. In some cases, a progressive reduction called taper relief applies.
There are also annual exemptions, including:
- An exemption of £3,000 per year for donations
- Small exemptions for small gifts
These thresholds can be used strategically, but must be monitored carefully.
Domicile and scope
One of the most important and technical aspects of the UK Inheritance Tax (IHT) system is the criterion that decides on which assets (wealth) this inheritance tax applies.
Until 5 April 2025 (old regime), the main criterion was domicile (a legal notion similar to a person's 'centre of permanent vital interests' or 'permanent home', not just temporary residence).
The rules were this simple:
- If you were UK domiciled, IHT applied on all your assets in the world (assets wherever they were).
- If you were non-domiciled (not domiciled in the UK, typically foreigners or expats with a 'home' elsewhere), IHT only applied on assets located in the UK (houses, bank accounts, etc. in the UK); overseas assets were excluded ('excluded property').
There was, however, an automatic exception: after 15 years of tax residence in the UK over a 20-year period, you became deemed domiciled, and then IHT would hit your worldwide wealth as if you were UK domiciled.
As of 6 April 2025 (new regime, applicable in 2025/26 and beyond), the UK has almost completely eliminated the concept of domicile for IHT (it has been abolished for most cases). The system became tax residence-based (long-term residence), simpler and more objective.
Now the key criterion is whether you are a long-term UK resident. You become one if:
- You have been tax resident in the UK for at least 10 years out of a period of 20 years immediately preceding the event generating the tax (for example: your death, or a transfer of assets into trust).
- If you are a long-term UK resident, IHT applies to your worldwide assets (assets anywhere in the world).
- If you are not long-term UK resident, IHT only applies on goods located in the UK, as before for non-domiciled.
In addition:
Once you become a long-term resident, you remain 'covered' by IHT even for a few years after leaving the UK (a 'tail' period of 3 to 10 years, depending on how many years you have been resident).
Domicile no longer counts (except in very rare or transitory cases).
Business Relief
The system provides specific concessions for certain company assets.
Business Relief may reduce the IHT exposure of the 50% or 100% on certain holdings in operating companies.
Not all activities qualify. Predominantly investment companies, for example, are often excluded. The distinction between business and investment activities is subject to review by HMRC.
A technical evaluation is essential.
News and developments from the next fiscal year
As of the next tax year, the Nil Rate Band and Residence Nil Rate Band thresholds will remain frozen. This leads to a fiscal drag effect, with an increasing number of assets falling under the tax.
In addition, as of next tax year, certain pension positions will also enter the valuation perimeter for Inheritance Tax purposes, with the consequence that many taxpayers may consider using instruments such as trusts as part of structured estate planning to mitigate tax exposure.
Structural reforms to the non-domiciled regime are also underway, with a gradual shift towards a more tax residence-based system. This change will have a major impact for individuals with international assets.
Inheritance Tax in Italy: Technical Analysis and Regulatory Profiles
The transfer of assets mortis causa in Italy is governed by the Legislative Decree No. 346 of 31 October 1990 (Consolidated Act on Inheritance and Gift Tax - TUS). Although the tax was abolished in 2001, it was reintroduced and remodelled by the Decree-Law No. 262/2006 (converted into Law No. 286/2006)which defines its current staggered structure.
1. Determination of the Tax: Rates and Deductions
Pursuant toArticle 2(48) of Decree-Law No 262/2006, the tax is determined on the basis of the degree of relationship, applying the following rates to the value of the units exceeding the franchise:
- Spouses and relatives in the direct line: Rate of 4% with an allowance of 1.000.000 € for each beneficiary.
- Brothers and sisters: Rate of 6% with an allowance of 100.000 € for each.
- Relatives up to the 4th degree and related (straight line and collateral up to the 3rd): Rate of 6% without deductible.
- Other subjects: Rate of8% without deductible.
For beneficiaries with severe disabilities, theArticle 2(49-bis) of Decree-Law No 262/2006 raises the deductible to 1.500.000 €regardless of the relationship.
2. Exclusions from the Inheritance Assets
Not all assets owned by the deceased contribute to the formation of the tax base. According to theArt. 12 of the TUSare exempt:
- Public Debt Securities: BOTs, BTPs and Ccts (including issues of other EU states) are excluded from the assets of the estate (Art. 12(h) and (i), TUS).
- Life insurance policies: Amounts paid to beneficiaries of life insurance policies are not subject to inheritance tax (Art. 12(1)(c), TUS e Art. 1923 of the Civil Code).
- Vehicles: Goods entered in the Public Register of Motor Vehicles (PRA) are excluded from the calculation (Art. 12(l), TUS).
3. The Transfer of Companies (Family Pacts)
A fundamental exception is provided for by theArt. 3(4-ter) TUSwhich facilitates the generational transfer of business. The transfer of companies or controlling stakes (S.p.A., S.r.l., S.a.p.a.) to descendants or spouses is tax-exemptprovided that the beneficiaries continue to carry on business or hold control for a period of not less than 5 years.
4. Property and Indirect Taxes
In the case of real estate, in addition to inheritance tax, the taxes regulated by the Legislative Decree 347/1990:
- Mortgage Tax (2%) e Land Tax (1%).
- In case of 'First home relief' (extended to successions from Note II-bis to Article 1 of the Tariff annexed to Presidential Decree 131/1986), taxes are due at the fixed rate of 200 € each.
5. Formal Obligations and Timing
La Declaration of Succession must be submitted electronically to the Revenue Agency by 12 months since the opening of the succession (Art. 31 TUS).
The exemption from presentation (for inheritances devolving to spouses/relatives in a direct line with assets of less than € 100,000 and no real estate) is governed by theArt. 28(7) TUS.
Conclusions
The differences between Italy and the UK are considerable, but well-structured estate planning remains the trump card for managing the estate of a deceased person.
The choice in life of some instruments rather than others determines in a substantial way a successful succession. As stated in the article, it is not enough to understand total assets but it is crucial to map the instruments and assets present.
Structured estate planning together with a professional theme avoids excess taxes and dispersion of assets
