Inheritance Tax for Dual Citizens

The following information on inheritance tax for dual citizens shall not constitute as legal or financial advice. This is merely general guidance provided by authors who are NOT certified tax professionals. 

US and UK passport

Tax can be quite complicated for dual citizens who receive a large sum of money into their account.

 

Expat life can be glamorous. Exotic locales, foreign cultures, and earning more/spending less than home are just a few advantages of living abroad. However, being overseas can raise complex issues, like taxation.

Income tax isn’t really an issue, as most major nations have straightforward tax treaties with each other. Inheritance and gift taxes are another matter – these vary considerably from one country to the next. If you aren’t careful with transfer sizes when moving assets/inheritances, you can get hammered by high rates.

In this guide, we’ll review various inheritance/gift tax regimes employed by various nations. This way, you can avoid having a chunk taken out of your life savings by the government.

Inheritance taxes in different countries

Inheritance and gift taxation in the UK

In the United Kingdom, the government taxes inheritances at a rate of 40% on estates worth more than £325,000. This levy functions as a marginal tax (i.e. all amounts above £325,000 are imposed, not the entire amount). If the estate in question leaves to a spouse/partner or charity, the inheritance tax doesn’t apply.

How does this affect you as an expat? If you don’t have property or bank accounts in the UK, you are considered a non-resident for tax purposes. Additionally, you need to have resided outside the United Kingdom for 15 of the past 20 years to be exempt from this tax.

What about gift taxation? No annual limit exists between spouses/partners. For everyone else, there is a yearly limit of £3,000 – all amounts above this add to the giver’s estate.

The ‘seven-year rule’ is where things get complicated. If you receive gifts from family more than seven years before they die, the government assesses no inheritance tax. Between seven and three years before death, a sliding scale applies to amounts over £325,000. For instance, an expat would have to pay 8% on applicable amounts received 6 1/2 years before someone dies. If that amount is given 5 1/4 years before death, the rate is 16%, and so on.

Finally, depending on where you currently live, double taxation issues may be avoidable. Get your executor to check into the tax treaty between the UK and your present home nation. If they tax the same assets, you can get relief on amounts already paid in one country.

Additional information: inheritance tax in the UK

 

Inheritance and gift taxation in the US

If you are a dual citizen repatriating an inheritance from America, you’re in luck. Thanks to estate tax changes passed by the Trump administration in 2018, the exemption doubled to $11.18 million. Any wealth above this amount is subject to a marginal tax rate of 40%.

Gift taxes are quite liberal in America as well. Each citizen is permitted to receive $15,000 annually from a benefactor, tax-free. The generation-skipping tax, which governs asset transfers to those 37.5 years younger than the donor, allows $5.45 million to be moved tax-free. The government taxes every dollar above this limit at 40%. Finally, no limit exists for gifts between spouses.

Additional information: dual citizen inheritance taxation

 

Inheritance and gift taxation in Australia

Australia has no inheritance or gift taxes. Apart from capital gain taxes assessed on the sale of a property, you won’t pay anything. However, dual citizens of countries that charge estate taxes on worldwide assets need to account for these policies.

Thanks to high exemptions, Australian-American dual citizens should be fine, unless the estate’s value exceeds 11.18 million USD. In this case, every dollar above that amount will subject to a rate of 40%. Australian-British dual citizens that follow domicile rules (no UK assets, spending 15 of the last 20 years outside the UK, etc.) can avoid paying inheritance taxes in Britain.

 

Inheritance and gift taxation in Hong Kong

Hong Kong abolished its estate duty in 2006 and has no gift tax. There has been recent talk of reinstating it, but authorities have taken no action as of April 2019. As always, be aware of the tax situation in the nation where you hold citizenship. By confirming that you don’t owe overseas gift/inheritance taxes elsewhere, you’ll avoid being taken by surprise.

 

Inheritance and gift taxation in the UAE

There are no inheritance or gift taxes in the United Arab Emirates. However, in the absence of a notarized and Arabic-translated Will, local laws determine who gets what. As such, it is imperative that dual UAE citizens prepare a Will that meets the approval of the Inheritance Court.

Otherwise, UAE authorities may freeze surviving spouses out of joint bank accounts, the courts will determine custody of any children, and so forth.

 

Inheritance and gift taxation in South Africa

As a dual citizen of South Africa, you are subject to estate duty on assets exceeding 3.5 million ZAR. You are required to pay 20% on every Rand above that amount, and 25% on assets above 30 million ZAR.

A donation tax also applies on gifts above 100,000 ZAR per year. Above this amount, you’ll pay a rate of 20% up to 30 million ZAR, and 25% on gifts worth more than that. The United Kingdom is a country where South Africans hold dual citizenship. Given South Africa’s low exemptions, ensure you are not considered domiciled in the UK per their tax laws.

 

Inheritance and gift taxation in Israel

Technically, Israel has no inheritance or gift taxes. Don’t breathe a sigh of relief, though – if you inherit property or other non-cash assets, you’ll have to pay capital gains taxes. When you sell them, rates of 20-50% will apply, dependent on the profit realized.

This figure doesn’t include taxation from other jurisdictions. No provision in Israeli law protects payers of capital gains from double taxation. If HM Revenue and Customs consider you domiciled in the UK, their rates apply as well. Because of this, effective tax rates as high as 80% can exist. If you are a dual UK/Israeli citizen, consider your tax resident status in the UK, so you don’t end up in this situation.

 

Inheritance and gift taxation in France

France has a complicated inheritance and gift tax regime. As a dual citizen, inheritance tax applies to your worldwide estate if you are a French resident, and to French assets only if you’re a non-resident. It ranges from zero for spouses and civil partners, to as high as 60% for remote relatives.

Exemptions and tax rates vary greatly, depending on your relationship to the deceased. Parents, children, and grandchildren can inherit the first €100,000 tax-free. Beyond that, they’ll pay between 5-45%. French law exempts €15,932 on inheritances to brothers and sisters, with rates of 35-45% assessed on more significant amounts. Distant relatives inherit even less tax-free, paying a high flat tax of 55-60% above tax-free allotments.

French gift taxation is similarly headache-inducing. Depending on the giver’s relationship to the receiver, exemptions vary considerably. Spouses/partners can transfer €76,000 worth of gifts to each other per ten-year period. For children and grandchildren, the limit is €46,000 and €36,000, respectively. The law makes a special exception if the recipient is disabled; in this instance, they can get an additional €46,000 per ten-year period.

Be careful when giving gifts to siblings. In France, there is a one-time limit of €5,000 per person – further gifts are subject to taxation. These rates are as follows: on amounts greater than the aforementioned exemptions, spouses/partners pay 5-45%, children pay 5-45%, and siblings pay 35-45%.

How can you minimize your tax burden as a dual French citizen? If possible, avoid being a tax resident of France. If you are a non-resident of France, authorities will only assess tax on ‘Immeuble’ property (i.e. land and buildings). This distinction means you can claim furniture, shares, and cash assets without being taxed.

If you plan on moving to France with your spouse/partner, equally divide assets (or to your mutual liking). As noted, the gift tax is charged between spouse/partners – ensuring optimal allocation of assets will avoid unpleasant surprises later.

 

Inheritance and gift taxation in Spain

Spain has inheritance and gift taxes, which differ depending on specific groups. Children under 21 are part of Group I: they can inherit up to €47,859 tax-free. Children over 21, spouses/partners, grandchildren, and parents make up Group II: they are tax-exempt on the first €15,957 inherited.

Sisters/brothers, aunt/uncles, nieces/nephews, and in-laws, which are members of Group III, are entitled to €7,993 tax-free. Group IV, which covers cousins, unmarried partners, and the unrelated, are not exempt from inheritance tax.

Beyond the tax exemptions laid out above, recipients will pay between 7.65-34% on inherited assets. How can you reduce your burden? First, some states have higher exemptions than the ones set out by the federal government.

If you plan on making Spain your home, live in a region like Andalusia. Recently, they introduced a €1 million exemption for members of Groups I and II. As long as you have €1 million or less in assets, these two groups can inherit it all tax-free. If you have a cent more than €1 million, your estate will not qualify for this exemption.

Gift taxation in Spain can be brutal. Unlike other nations, no tax-free exemptions exist for any group. At the time of death, you will need to pay taxes between 7.65-34% on any lifetime gifts received. You can avoid this issue by transferring gifts to a foreign company. You can assign shares in this enterprise to your heirs. This way, it is the shares that own the asset, not the actual recipient of the gift. You owe no gift tax in this instance, but smaller transfer and capital gains taxes may apply.

 

Inheritance and gift taxation in Germany

Inheritance and gift taxes in Germany fall under the same rules, with only a few exceptions. In general, inheritance/gift tax exemptions are quite generous for those most closely related to the deceased.

The following tax-free exemptions apply: spouses/partners can get up to €500,000; children and stepchildren can receive up to €400,000 from deceased parents; Parents can collect up to €100,000 from dead children; and siblings, nephews/nieces, step-parents, non-blood relatives, divorcees, unrelated friends, and legal entities can inherit/receive up to €20,000.

Above these limits, inheritance/gift tax rates apply. These differ depending on the group in question: spouses/partners, children/stepchildren, and parents will pay between 7-30%; siblings, nephews/nieces, step-parents, non-blood relatives, and divorcees are charged 15-43%; non-blood related individuals and legal entities are assessed a rate between 30-50%.

How can you minimize your inheritance/gift tax obligation as a dual German citizen? First, know that Germany has tax treaties with nations like France, Switzerland, and the United States. If an overseas government has already taxed foreign-based assets, you’ll likely qualify for a credit up to the amount paid.

Secondly, consider relocating to Germany. German inheritance/gift tax laws are much friendlier to German residents than to non-residents. Non-residents can only claim a €2,000 exemption before taxes apply, regardless of their relationship to the deceased. As outlined above, exclusions for German residents are as high as €500,000. If you own property in Germany, have lived in an established residence for six months or longer, or have resided in the country in the past five years, you’ll qualify as a resident in the eyes of the government.

 

How using a money transfer company can help

 After dealing with local authorities, you’ll then have to repatriate your inheritance. Many heirs make the mistake of dealing with local banks. For example, Barclays, a major financial institution in the United Kingdom, charges high fees and poor exchange rates.

Let’s say you’ve got to move a bequest of £100,000 from the UK to the United States. If you work with Barclays, you’ll get a rate of 1.2414, meaning you get 124,140 USD at the other end, less fees. Compare that to the interbank rate, though – at 1.2991, there’s a 4.4% difference between it and Barclay’s.

If you were to initiate this transfer with World First, you’d get a rate much closer to the interbank rate – 1.2960. This difference means you would receive 129,583 USD – more than 5,000 USD more! Banks charge their own taxes every day via exorbitant rates. By opting for a money transfer provider, you’ll keep more of what’s rightly yours.

 

Conclusion

Inheriting assets is, by definition, a bittersweet affair. The law obliges us to deal with government authorities and banks, but making complex financial decisions whilst grieving is a recipe for financial disaster. By planning in advance, you can shelter your inheritance to the maximum extent allowed by law.  These two options, you will be thrilled at the capital you will save.