As the Balearic Islands scrapped IHT and still manages to post record tax revenues, financial advisers may wonder if the UK could follow suit? Ingrid McCleave (pictured), Partner at law firm DMH Stallard, explores what lessons Britain can learn from this bold tax policy shift — and whether IHT reform could help retain wealth, attract investment, and ultimately boost Treasury receipts.
Inheritance tax remains a contentious issue in Europe with significant variation across different EU member states. Most European countries impose estate, inheritance and gift taxes, but some do not, including Austria, Cyprus, Latvia, Estonia, Norway and Sweden. Although Spain does apply inheritance tax (succession tax) at a national level, the rules can vary significantly between the 17 autonomous Spanish regions, such as Catalonia and Galicia.
Another autonomous region, the Balearic Islands (Mallorca, Menorca, Ibiza and Formentera) decided to abolish Inheritance Tax (IHT) in 2023. This eradication of IHT applies between parents and children, grandchildren and grandparents, and between spouses, both on death and, through inheritance agreements, during their life as well. Abolishing IHT in this way simplifies the local tax system and removes what many believe to be an unfair and punitive tax.
Notwithstanding the loss of €59m of IHT, the Balearic Government achieved its highest-ever total tax revenues of €4.43bn (£3.68bn) in 2024, a substantial increase of more than €800m (£669m) compared to 2023.
Taxes from other sources, most notably income tax, increased thanks to the buoyant Balearic economy which saw particularly strong growth in tourism. Income tax revenue comprised the bulk of the increase: up by €616m (£510m) to €2.1bn (£1.7bn). The other principal gains included IVA (VAT), up by €63m to €1.86bn, as well as excise duties and environmental taxes, which rose by €130m to €474m.
But the Balearic Islands also face challenges relating to overtourism which has led to large anti-tourism protests in Mallorca and Ibiza. Looking ahead, the Balearics plan to raise sustainable tourist taxes for 18.7m annual visitors by up to 200% in peak season on accommodation and cruise ships. During the summer months, the average holidaymaker will need to budget €42 (£35) per head per weekin sustainable taxes, which could raise an estimated total of around €500m (£418m) a year.
So, what lessons can the UK learn on IHT from the Balearics? Manifestly, the structure of the UK economy is very different: tourism represents only 9% of GDP, compared to more than 40% in the Balearics in 2024. Equally, the scale of IHT operates at a very different level: it is anticipated to raise £8.3bn for HM Treasury in 2024-25.
Given the current position of the UK economy, the abolition of inheritance tax would require significant adjustment elsewhere. Although this would be politically difficult, there is an economic argument that IHT reform could be just as effective in the UK as it was in the Balearic Islands by helping to increase the take from other taxes.
For example, if the current UK inheritance tax exemption for spouses, whereby no inheritance tax is paid on gifts made on death to spouses or civil partners, was also extended to children, in all likelihood this would significantly diminish the mass exodus of the non-domiciled and UNHWIs from the UK.
In turn, this would increase the amount of revenue to HM Treasury derived from income tax and VAT, as well as levies from Stamp Duty Land Tax on high-value property purchases. Should the ultra-rich continue to leave the UK at the current rate – last year, the UK experienced a net loss of 10,800 millionaires, second only to China – then HMRC will ultimately lose the inheritance tax from their estates regardless.
By contrast, making the UK a more attractive place for the ultra-rich to live by reducing or abolishing inheritance tax could be just the boost that the UK economy needs. Arguably, it is as crystal-clear as the water on a Majorcan beach that a growing economy leads to increased tax revenue, which enables governments to fund more public services and reduce debt.
