When Taxes Collide

A full version of this article was published on 24 March and can be found in Taxation Magazine here

The 2025 UK tax year ushered in sweeping reforms to the country’s rules on inheritance tax (IHT), significantly broadening its reach. For German taxpayers acting as settlors or beneficiaries of UK connected trusts, a critical question emerges: can UK inheritance taxes be credited against German tax liabilities and if so, to what extent?

In this article, we provide an overview of IHT as it applies to trusts. We also explore practical scenarios where crediting UK taxes in Germany can make a significant difference.

Inheritance tax reforms

Recent reforms to UK IHT introduced two major changes:

1. The former remittance basis for individuals “resident but not domiciled” in the UK has been replaced with the Foreign Income and Gains (FIG) regime.

2. Long term UK residence now determines whether IHT applies to non UK assets, replacing the previous focus on domicile.

A long term resident is someone who has lived in the UK for at least 10 of the last 20 tax years. Although domicile still matters where a tax treaty exists (e.g., with the US, France or India), the default rule now relies on residence.

A key consequence of the reform is the introduction of an “IHT tail”. This means an individual may remain subject to UK IHT on their worldwide estate for three to 10 years after leaving the UK, depending on how long they were resident:

This is significant given the UK’s 40% IHT rate and relatively low £325,000 nil rate band, with limited reliefs available.

Taxation of trusts with IHT

IHT also applies to trusts created during a person’s lifetime if the settlor is a long term UK resident, regardless of whether the trust is onshore or offshore. A 20% charge applies when the trust is set up, followed by a ten year anniversary charge of 6% on its net assets. An exit charge of up to 6% may also apply when assets are distributed, depending on how long it has been since the last ten year charge; the exit charge may also apply if the settlor later ceases to be long term UK resident.

State of play under German law

UK IHT applies to trusts from their creation through to the distribution of assets. When a settlor or beneficiary is domiciled in Germany, German rules may also apply—specifically s.15 AStG, which prevents tax avoidance by allocating the trust’s income to German resident settlors or beneficiaries, even if no distribution is made (“dry income taxation”).

Under these rules, the settlor or beneficiary is taxed as if they had personally received the income. Exceptions are available under the s.15(6) AStG escape clause, which recent case law confirms can also apply to trusts based in third countries such as the UK.

Crediting UK taxes against German attribution tax

In principle, foreign taxes paid by a trust can be credited against German attribution tax, but only if they qualify as taxes on income under s.15(5) AStG and s.34c EStG. Since the ten year anniversary charge under UK IHT is a substance tax on assets, not income, it cannot be credited. The same applies to corporate income tax rules, which are irrelevant for natural persons.

The UK exit charge of up to 6% on trust distributions is also not creditable, as it is not comparable to German income tax and is paid by the trustee rather than the beneficiary. Although trustees and beneficiaries may agree who bears the cost, the legal liability remains with the trustees.

Deduction when deciding the attribution amount

Although the UK’s ten year anniversary charge and exit charge are not creditable as income taxes under s.34c EStG, they still reduce the trust’s net assets and therefore the amount that can be attributed to beneficiaries. For this reason, it is reasonable to take all trust level costs – including IHT – into account when calculating the attribution amount under s.15 AStG, so that only the trust’s actual surplus is taxed.

This approach is supported by the German UK tax treaty (Art. 21(2)) and by Federal Fiscal Court case law, which confirms that only the real economic surplus of a foreign estate or trust should be taxed. Ignoring these costs would result in excessive taxation, attributing income that could never actually be distributed.

Does s 21 ErbStG allow crediting?

Because the ten year anniversary charge is a substance tax under UK IHT, it could in theory fall within German IHT rules. However, without a UK–Germany IHT treaty, double taxation relief must rely on s.21 ErbStG, which allows crediting of foreign taxes only where there is an actual acquisition.

Attribution taxation under s.15 AStG does not involve a real acquisition, income is only fictionally attributed so the IHT anniversary charge and UK income tax on trust income cannot be credited under s.21 ErbStG.

The position differs for the 6% exit charge on distributions to German intermediate beneficiaries. These distributions count as gifts under s.7(1) no.9 ErbStG, meaning the exit charge can generally be credited against German gift tax.

Practical note

A credit is not available when a trust is fully terminated, as there is no longer an intermediate beneficiary. Whether a full termination has occurred depends on foreign civil law. A pro rata credit of the ten year anniversary charge is also excluded because it is not treated as a taxable acquisition under German law, and foreign substitute inheritance taxes are generally not creditable.

Summary

Care is needed where UK relevant property trusts involve settlors or beneficiaries with unlimited tax liability in Germany. Before moving to Germany, or when planning cross border succession, it may be advisable to review or adjust existing trust structures, especially given the tightened UK IHT tail rules. A UK trust may still work in some cases, but usually only on a temporary basis. To avoid double taxation, coordinated German and UK tax advice is strongly recommended for relocations and succession planning.

Michal Fabian Kühn TEP is a tax adviser, graduate economist (Diplom-Volkswirt), certified specialist adviser in international tax law and partner in Flick Gocke Schaumberg in Frankfurt am Main. He can be contacted by email: michal.kuehn@fgs.de.

Ruth Junius-Morawe is a trust and estate lawyer and works as associated partner at Flick Gocke Schaumburg in Berlin. She can be contacted by email: Ruth.junius-morawe@fgs.de.

Would you like to know more?

Understanding how UK and German tax regimes interact is essential to protecting your wealth and avoiding unexpected liabilities. For tailored advice on trust structures, succession planning or relocation, speak to your usual Blick Rothenberg contact or Kugan using the form below.