Understanding inheritance law and taxes

Consult a tax advisor, accountant or lawyer

As with most complex matters, the wisest approach is to seek counsel and guidance from professionals. While filing taxes or handling inheritance in your home country may be processes you are familiar with and find relatively simple, the involvement of comparative law makes everything twice as risky. If you are an American expat in China, while you might fully understand the rules of the IRS back home, you might not be familiar with the granular details governing the US-China tax treaty or with Chinese inheritance law.

If you are a C-suite executive or business owner living abroad, you likely already have an accountant for financial guidance. For other expats without an accountant, it is wise to hire the services of a tax advisor or lawyer for a detailed review of your case if a close family member back home passes away, leaving assets behind, or transfers them to your name while they are still alive.

Even seemingly straightforward inheritance cases can hide details that may lead to unexpected tax liabilities. For example, inherited assets such as a rental property listed on Airbnb, a restaurant, or dividend-yielding stocks could trigger different tax rules if they continue to generate income in your home country. Different rules governing inheritance could apply depending on how long you have lived in your expat destination. If your deceased relative held dual nationality, this can further complicate matters, as the laws of three different countries might come into play: your current country of residence as an expat and both countries of your late relative's citizenship.

To save yourself a future headache or bad surprise, it's best to pay a professional to assess your case. They will counsel you on how to make the most of any existing double taxation treaties and decrease your tax burden as much as possible. If you are dealing with a cross-border inheritance case following the demise of a loved one, your state of grief and mourning might also make it difficult to concentrate on handling all of these formalities on your own. This makes it even wiser to transfer some of these responsibilities onto a tax advisor, accountant or lawyer.

Important terms relating to inheritance to know about

Here is a glossary of terms you will likely encounter in your cross-border inheritance case. Keep in mind that these terms may vary across cultures and legal systems, as no two legal systems are exactly alike and some concepts may not translate perfectly into other languages. However, they remain very common worldwide.

• Assets: Tangible and intangible items of economic value that a person owns and that they can pass on to their family either before or after their death. This includes real estate (land and houses), vehicles, bank accounts, stocks, businesses (e.g., a restaurant), intellectual property (e.g., the rights to the books a person wrote), jewellery, and artwork, among others.
• Inheritance tax (IHT): A tax imposed on you as the recipient of the assets of a deceased person or as the recipient of a gift/donation of assets from a living person. The exact amount of the tax is determined by various factors, such as the value of the assets, your relationship to their previous owner, and your residency status, particularly if you are an expat.
• Domicile v/s residency: Domicile is the country considered your permanent home, while residency refers to where you currently live, such as a temporary expat location while you are on a 3-year work contract. Your domicile or residency can either refer to the same country or different ones, and this distinction is significant for inheritance laws and taxes. Some countries base inheritance taxes on your domicile, hence taxing your assets located anywhere in the world, while residency may also affect local tax obligations. Understanding the difference is crucial for effective tax and inheritance planning.
• Estate planning: The act of planning what will happen with all of your assets after you pass away. It includes listing all of your assets and writing your will.
• Executor: The person designated to administer the distribution of a deceased person's estate according to the will left behind.
• Gift or donation: A transfer of assets while the original owner is still alive, rather than after their death. For example, if your living mothers transfers her car to your name, that is considered a gift or donation.
• Capital gains tax (CGT): This tax applies to gifts or donations rather than inheritances from a deceased person. It is levied on the profits gained from transferring an asset.
• In cross-border gifts or donations, fluctuations in foreign exchange rates can impact CGT if the asset is being transferred in a different currency than the one used by the recipient for tax reporting. For example, if your mother in Australia purchased a house in Sydney for 900,000 AUD and later transferred it to you, an Australian expat living in Europe, any exchange rate changes between Australian dollars and euros from the time of her purchase to the time of the transfer could be factored into the CGT calculation. Oftentimes, even if expats do not need to pay inheritance tax (IHT) on a cross-border gift, the donor (the relative gifting them the asset) will still have to deduct CGT from the asset's current value.
• Trust fund: An arrangement in which a collection of your assets are managed by a third party, called a trustee. It can be a useful tool for minimizing your taxable estate when transferring assets to family members. However, expats should remain aware that setting up a foreign trust should not be used as a means to evade taxes, even if it helps lower tax liabilities. Failing to report the existence of a foreign trust to the tax authorities of your home country while you are living abroad can be a criminal offense.
• EU Succession Regulation: Passed in 2015, this regulation simplifies cross-border inheritance and donations within the European Union. It is very useful for European expats residing in another EU country. These expats can, for example, decide whether to apply the inheritance laws of their home country or their country of residence. This choice can be made in their will or through a separate written declaration. Unfortunately, it does not apply in Denmark and Ireland, and it has no effect on certain aspects of inheritance, such as inheritance tax (IHT) or the established property regime of your marriage.
• Forced heirship: A law in some countries that requires one part of a deceased person's estate to automatically be willed to their children, which means it is illegal to disinherit your own children. In some cases, it also applies to spouses. Some countries with forced heirship are Spain, Italy, Portugal, France, Germany, Japan, South Korea, and Brazil. You should consult with your lawyer to check if forced heirship will apply in your case as an expat. If you are considered domiciled in your country of expatriation, and if you own immovable property in that country, it may well apply to you.
• Double taxation treaty or bilateral tax agreement: Most countries with a good diplomatic relationship will have signed such a treaty, so that their citizens living in the other country do not have to be taxed twice, including on inheritance. By paying inheritance tax in one of the two countries (e.g., your expat destination), you receive tax credits or relief in the other country (e.g., your home country).

Countries to be careful in when conducting cross-border asset transfers

When dealing with a case of cross-border inheritance, these are the key questions to ask yourself:

• Does your home country and country of expatriation levy inheritance tax (IHT)?
• Is there a threshold before inheritance tax starts to apply? How high or low is this threshold?
• Does a double taxation treaty exist between your home country and host country? Consult its terms. Do other laws, such as the EU Succession Regulation, also apply to you?
• What if your relationship with the person who is transferring their assets to you or to whom you are transferring your assets? Different inheritance rules tend to apply to spouses, parents and children, siblings, other relatives, or people you are not related to. For example, in Mexico, taxes are not levied on gifts between spouses or from parent to child. A tax would apply, however, if an asset was first first gifted from a child to a parent who then gifted it to another child.

Some countries specifically have trickier rules concerning cross-border inheritance for expats. Here are some of these countries where it is wise to consult a lawyer to plan your estate:

The UK

Bad news for long-term expats residing in the UK whose permanent domicile is still their home country. In October 2024, the new British Labour government changed the non-dom rules affecting inheritance tax (IHT) so that now, the state considers residency rather than domicile in levying IHT. Furthermore, the term “LTR” (Long-Term Resident) has been introduced in the law to define an expat who has been living in the UK for at least 10 out of the last 20 years. All of this will come into effect in April 2025.

LTR expats will need to pay a 40% inheritance tax on their worldwide assets that are above a £325,000 (around 415,000 USD) threshold. Furthermore, an expat will remain considered an LTR for 3 years even after they leave the UK if they were a resident in Britain for 13 years out of the last 20. One additional year as an LTR is added to these 3 years with each extra year. This has sent many high-earning, long-term expats into a panic. The Financial Review even reports that Australian expats fitting this profile are planning to leave the UK before April when the reforms will be enforced.

However, not all expats will be affected by these changes. You have no reason to worry if you're a short-term expat planning to stay in the UK for less than 10 years. Similarly, expats without any assets exceeding £325,000 or family members who transfer such assets to them at one point in their lives will remain unaffected. Long-term British expats in other countries who have not been UK residents in the last 20 years are also safe from this inheritance tax.

The US

The US is well-known for having a tax authority, the IRS, that taxes American citizens regardless of where they are living in the world. Fortunately, at the federal level, the IRS does not tax foreign assets willed or gifted to US citizens. Even so, these transfers must still be reported to the IRS to avoid a hefty 25% penalty. Additionally, a federal estate tax applies to such transfers, but only if they exceed a high lifetime exemption threshold, which is currently $13.61 million per individual, or double that amount for married couples.

Furthermore, while there exists no inheritance tax at the federal level, six states levy an inheritance tax: Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland. If you are an American expat abroad hailing from these states or a non-American expat residing in these states, consult your lawyer or a tax advisor to know what the inheritance implications are in your specific case.

Spain

Spanish expats living outside the EU should exercise caution regarding inheritance tax and work closely with their lawyer to plan their estate. As explained by the firm Spanish Lawyer NYC, these expats are required to pay inheritance tax to the Spanish state but may not always qualify for the deductions that would have been available in their former autonomous community of residence in Spain. Without careful planning, they could face an extremely high inheritance tax if, for example, their parents pass away in Spain and leave them some assets.

Japan

Japan levies worldwide inheritance tax that can be as high as 55% of the transferred asset's value. Unfortunately, it also applies to the worldwide assets of non-Japanese expats who have been living in the country for a long time (10 out of the last 15 years) or have a visa listed under Table 2. Table 2 visas include professional and specialized work visas as well as visas for entertainers, academics and cultural experts.