Estate and inheritance tax: the general shape

Death taxes vary more between countries than almost any other area of tax. Some countries have none. Others tax substantially. The mechanisms differ fundamentally.

Not tax advice, and the rules change frequently. This is an orientation to the structures so that you know what questions to ask.

The two basic models

Estate tax is charged on the estate as a whole, before distribution. The rate depends on the size of the estate.

Inheritance tax in the strict sense is charged on the recipient, and the rate frequently depends on the relationship — spouses and children paying less or nothing, distant relatives and unrelated beneficiaries paying more.

Several countries use elements of both, and terminology is used loosely, so the name of the tax does not reliably tell you which model applies.

The features that recur

Thresholds or allowances. An amount that passes free of tax. These vary enormously — from very low to very high — and are the single most important number in any system.

Spousal exemptions. Most systems allow transfers between spouses or civil partners free of tax, sometimes without limit. This frequently defers rather than eliminates the tax, since it becomes payable on the second death.

Unmarried partners frequently do not benefit from this, which is a substantial practical consequence of not marrying and is worth knowing.

Reliefs for particular assets. Business assets, agricultural property, and in some systems the main residence, frequently attract relief. These are the reliefs most often the subject of planning and most often changed by legislation.

Charitable exemptions. Gifts to qualifying charities are typically exempt, and some systems reduce the rate on the rest of the estate where a defined proportion goes to charity.

Lifetime gift rules. Most systems have provisions preventing tax being avoided by giving everything away shortly before death — typically a look-back period during which gifts are brought back into account, or a system taxing lifetime gifts directly.

The length of the look-back period is a key variable and differs substantially.

The planning that generally works

Subject entirely to local rules, and this is where advice is essential.

Using allowances and exemptions that exist, which requires knowing what they are. Annual gift allowances, exemptions for regular gifts out of income, and exemptions for gifts on marriage all exist in some systems and are frequently unused.

Lifetime giving, early enough to fall outside any look-back period.

The obvious caution: do not give away assets you may need. People who transfer property to children and then need care, or fall out with the children, or need the money, find themselves in serious difficulty with no recourse.

Charitable giving, which in some systems reduces the rate applied to the remainder.

Life insurance written in trust, which in some jurisdictions provides funds outside the estate to pay the tax, avoiding the need to sell assets.

Pension planning, which in some systems allows pension funds to pass outside the estate. This is an area of frequent legislative change.

Ensuring reliefs are available, since business and agricultural reliefs frequently have conditions that must be met, sometimes for a period before death.

The planning that generally does not work

Giving away your home while continuing to live in it. Most systems have rules addressing this directly, treating the asset as still yours. Schemes based on it have consistently failed.

Aggressive artificial schemes. Tax authorities in most jurisdictions have general anti-avoidance rules, disclosure requirements, and a track record of successfully challenging arrangements whose main purpose is avoidance.

People who bought into such schemes have frequently ended up paying the tax, plus interest, plus penalties, plus the fees they paid the promoter.

Anything sold at a seminar. Covered in our article on trusts. The warning signs are the same.

The cross-border problem

Genuinely complicated and increasingly common.

Different countries claim taxing rights on different bases — domicile, residence, nationality, or the location of the assets. It is entirely possible for two countries to claim tax on the same estate.

Double taxation treaties exist for estate taxes between some countries and are far less comprehensive than income tax treaties.

Anyone with assets in more than one country, or who has moved countries, or who holds property abroad, needs specialist advice. This is not an area for general guidance, and the mistakes are expensive.

Note also that domicile is a technical legal concept in some systems and is not the same as residence or nationality. People frequently assume they have shed a domicile they retain.

The practical point about liquidity

Under-considered and frequently the real problem.

In systems where tax is payable before the grant of probate, the estate may need to find a substantial sum before it can access any of the assets.

Where the estate is largely a house, this forces borrowing or a rushed sale.

Arrangements addressing this — instalment options, direct payment from bank accounts, or insurance written in trust — exist in various jurisdictions and are worth asking about.

The proportionate response

Find out whether your estate is likely to be liable at all. In many countries, most estates are not.

If it is, get advice from a qualified professional in your jurisdiction, and be sceptical of anything that sounds clever.

And do not let tax planning distort sensible arrangements. Giving away assets you need, or structuring an estate in a way that causes family conflict, in order to reduce a tax bill, is frequently a poor trade.

This is general information, not tax advice. Rules differ substantially by country and change frequently. Consult a qualified tax adviser or solicitor in the relevant jurisdictions.