Head of Private Clients
Rapid advances in digital communication and the subsequent propagation of media technologies has made countries and communities around the world increasingly connected. So much so that the term “global village” is commonly used to describe the interconnected nature of society in the digital age. Combine this with modern travel, which is more affordable and accessible than ever before, and it’s easy to see why people often say “the world is getting smaller”. For anyone with friends or relatives overseas, these are welcome conditions that allow us to maintain a close relationship with our nearest and dearest wherever they live in the world - from jumping on a cheap flight to calling them over Zoom.
But what if the worst happens? Should they pass away and leave you an inheritance - whether in the form of property, savings, retirement funds, shares or other financial products and assets - you will need to understand your tax obligations, which can become a burden at an already difficult time. The laws governing inheritance vary from country to country, so to help you understand the legal landscape within certain emigration hotspots, we have done some research on your behalf.
There is no tax for inheritance in Canada. Instead, the Canada Revenue Agency (CRA) collects taxes owed to the government from the estate prior to it being transferred to you, the beneficiary, via a final income tax return. The CRA does not add tax to the assets of the estate; however, all tax owed on income up to the date of death must be paid.
A final tax return must be filed in Canada - as of the date of death - via the executor of the will. Once this has been completed and the tax taken from the estate, the CRA will issue you a Clearance Certificate confirming all taxes have been paid. Without the certificate, you could be liable for any outstanding funds the deceased owes.
You will avoid this income tax charge if you are an ‘eligible person’ that has been legally designated as the beneficiary of the registered assets. An eligible person includes:
- A spouse or common-law partner
- A financially dependent child or grandchild
- A financially dependent, mentally or physically infirm child or grandchild of any age
You will also encounter probate fees when managing inheritance in Canada. Each Canadian province sets its own fees, which are charged based on the total assets of the estate.
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As is commonly the case with US law, how inheritance is governed depends on the state the deceased lived in. There are some common rules linked to tax, however.
If your relative was not domiciled in the USA they can be subject to US estate tax. However, their estates are subject to estate tax on their US assets only – not their worldwide assets. If they were domiciled in the US, this provides significant advantages over residents of other countries due to the favourable provisions of the UK/USA tax treaty. The estate tax imposed in the US on a domiciliary of the UK will be limited to the estate tax that would have been imposed if the deceased had been domiciled in the US immediately before their death.
Do you need to file a tax return for estate tax? Yes, even if no tax is due, an estate tax return is required if the value of assets in the US exceeds $60,000 at the date of death.
If you receive an inheritance from Ireland, you may be liable to pay inheritance tax. The inheritance sum will be taxed if it exceeds a certain limit or threshold that’s dictated by the relationship between the deceased and you, the beneficiary. Capital Acquisitions Tax is charged at 33% on the amount above the threshold for the relationship group you fall into:
- Group A: beneficiaries who are children of the deceased - including adopted children, stepchildren and certain foster children. The tax-free threshold for this group is €320,000
- Group B: siblings, nieces and nephews or lineal ancestors of the deceased. The tax-free threshold for this group is €32,500
- Group C: in all other cases, the tax-free threshold is €16,250
The following funds are exempt from Capital Acquisitions Tax:
- Inheritance from a spouse/ civil partner
- Compensation or damages payments
- Lottery, sweepstake, gambling winnings
- Benefits for those permanently incapacitated due to mental or physical illness
- Retirement benefits, pensions, redundancy payments
- Benefits received from a charity
The UK has a double taxation convention with Ireland.
You will be pleased to know that Australia scrapped inheritance tax altogether in 1979 to enable assets to be passed down from generation to generation tax-free and by 1984 all estate duties were removed, both state and federal.
In place of inheritance tax, the Australian Taxation Office now advises that Capital Gains Tax may be paid in the event that an asset received from an estate is later sold. In this case, you would potentially be required to pay capital gains tax on the proceeds of the sale. However, if the estate’s executor sells an asset to another person before distributing the proceeds to you, then the sale may incur capital gains tax, unless an exemption applies.
Inheritance taxes - AKA succession tax (impuesto de sucesiones y donaciones or ISD) - in Spain are paid by you, the beneficiary. The Spanish General Directorate of Taxes (the Agencia Tributaria) governs succession laws in the country and associated reliefs. It does this in line with Spain’s Inheritance and Gift Tax Act, which establishes a framework to regulate inheritance taxes. However, each autonomous region can modify applicable tax rates and reliefs for their own territories.
Back in 2015, the European Court of Justice ruled that both residents and non-residents receive the same treatment for tax purposes with regards to rates and allowances. Succession tax rates - as set by the Spanish government - fall within various brackets, based on the inheritance amount:
- Inheritance up to €7,993: 7.65%
- €7,993–€31,956: 7.65 to 10.2%
- €31,956–€79,881: 10.2 to 15.3%
- €79,881–€239,389: 15.3 to 21.25%
- €239,389–€398,778: 25.5%
- €398,778–€797,555: 29.75%
- €797,555+: 34%
Spanish law provides for succession tax reliefs across four groups, depending on your relationship with the deceased:
- Group 1: children (natural and adopted) under 21 years benefit from a tax-free threshold of €47,859
- Group 2: children (natural and adopted) over the age of 21, grandchildren, spouses, and parents/grandparents (including adoptive) benefit from a tax-free threshold of €15,957
- Group 3: siblings, aunts, uncles, nieces, nephews, in-laws, and their ascendants/descendants benefit from a tax-free threshold of €7,993
- Group 4: cousins, all other relatives, unmarried partners (unless the region allows it) and those who are unrelated do not benefit from a tax-free threshold
Anyone with a disability could benefit from a tax-free threshold of €47,859 or €50,253, depending on the extent of the disability.
French inheritance law derives from the French civil code and operates a residence-based approach. Therefore, French inheritance law applies to all French residents regardless of their nationality. Forced heirship rules mean that a proportion of the estate must be passed to the deceased’s children or spouse, irrespective of the provisions of a will. The remainder can then be distributed freely according to a French will.
Forced heirship rules set out the amounts to be paid as follows:
- If there is one child, they receive 50% of the estate
- If there are two children, they receive 66.6% of the estate between them
- If there are three or more children, they receive 75% of the estate between them
- If there are no children, the spouse can claim 25% of the estate
A couple must be married at the time of death for the spouse to be legally entitled to inheritance from the estate.
Current French inheritance tax rates are as follows:
Spouses: married couples and people in civil partnerships are exempt from paying inheritance tax in France.
Parents, children, and grandchildren:
- Tax-free allowance: €100,000
- 5% up to €8,072
- 10% on €8,072 - €12,109
- 15% on €12,109 - €15,932
- 20% on €15,932 - €552,324
- 30% on €552,324 - €902,838
- 40% on €902,838 - €1,805,677
- 45% over €1,805,677
Brothers and sisters:
- Tax-free allowance: €15,932
- 35% up to €24,430
- 45% over €24,430
Other relatives up to the fourth degree:
- Tax-free allowance: €7,967
- 55% flat-rate tax
Remote relatives and other beneficiaries:
- Tax-free allowance: €1,594 (€159,325 if disabled)
- 60% flat-rate tax
Perhaps you live overseas and have received an inheritance in the UK - what then?
You can live abroad and still be a UK resident for tax purposes, for example if you visit the UK for more than 183 days in a tax year.
In the UK there’s normally no Inheritance Tax to pay if either:
- The value of the estate is below the £325,000 threshold
- Everything above the £325,000 threshold is left to a spouse, civil partner, a charity or a community amateur sports club
If the estate’s value is below the threshold you are still required to report it to HMRC.
If you’re a child (including adopted, foster or stepchildren) or grandchild of the deceased, your threshold can increase to £500,000. If you’re married or in a civil partnership with the deceased and the estate is worth less than the threshold, any unused threshold can be added to your threshold. Therefore, your threshold can be as much as £1 million.
The standard Inheritance Tax rate in the UK is 40%, which is only charged on the part of the estate that’s above the threshold.
Funds from the estate are used to pay Inheritance Tax to HMRC, which is executed by the person dealing with the estate (the ‘executor’, if there’s a will). As a beneficiary, you do not normally pay tax on what you inherit. However, you may have related taxes to pay, for example if you receive rental income from a house you receive.
As a non-UK resident, you do not usually pay either Capital Gains Tax if you sell most assets in the UK or Inheritance Tax if you inherit assets located in the UK.
You’ll only pay Capital Gains Tax if:
- You make a gain when you sell property or land in the UK
- Assets you sold were used in a UK branch of a foreign business
- You were a UK resident and you return to the UK within 5 years of leaving
If you inherit an asset you will only pay Inheritance Tax if you inherited property, money or shares in the UK and the deceased’s estate does not possess the money to pay the Inheritance Tax.
Get the right help
Collecting an overseas inheritance can be complicated and time-consuming, so seeking trusted, expert advice is essential. A legal specialist in overseas inheritance matters can help you fill in the correct forms and meet your tax obligations. If you’re using a UK lawyer, check that they’re registered with the UK Law Society and have an in-depth knowledge of the inheritance tax laws for the country in question.
Once the legal stuff is taken care of and your tax status is confirmed, it’s time to think about sending your money back to the UK. A currency specialist like Clear Currency can help you overcome your sudden exposure to currency market risk.
Currencies are traded around the clock - 24 hours a day. Therefore, the value of the pound against other currencies is constantly changing - not just daily but by the minute. Even slight fluctuations in the rate of exchange can make a big difference to the final value of your inheritance.
Clear Currency specialises in helping clients that are transferring an inheritance to the UK from overseas to mitigate currency market risk and save money on their international payments - both large and small.
Transferring large sums of money into another currency and transferring them to another country can be daunting and confusing - especially at such a sensitive time. Aware of this, we use our knowledge and experience to cut through the jargon and give you a friendly and personal service.
We recognise that it’s impossible to accurately predict how exchange rates will perform; therefore, it’s prudent to plan for all eventualities. With this in mind, we will assign you a dedicated account manager. In addition to helping you benefit from quick, easy, reliable and secure transfers, they can help you mitigate the impact of currency risk on the value of your inheritance.
Your account manager will work in partnership with you throughout the international payment process. For example, before you make a payment, they can prevent the cost of doing so from escalating. Because fluctuating exchange rates make it hard to judge how much you’ll pay at any one time, your account manager can help you execute a forward contract to secure the cost of your international payments. This allows you to lock in an exchange rate for a date in the future, securing the price of your payments when the time comes to execute them - securing the value of your inheritance.