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With globalisation a reality, many Luxembourg residents' children - their future heirs - are living in other countries. With this in mind, Banque de Luxembourg's tax specialists have expanded their sphere of expertise in recent years to help Luxembourg residents find the best solutions for their inheritance.
“As there is little or no inheritance tax in Luxembourg for direct-line descendants, many Luxembourg residents don’t tend to think ahead about arrangements for passing on their wealth,” explains Anne-Lise Grandjean, tax adviser at Banque de Luxembourg for Luxembourg clients. “But if these residents have heirs living abroad or property investments in other countries, foreign inheritance laws may apply.”
The civil law applied to inheritance is generally the law of the country of residence of the deceased, as Anne-Lise Grandjean explains. However, since 2015, it has been possible in Europe, to draft a will that opts for the civil law of the deceased’s country of nationality if this is different from their place of residence. “There are many misconceptions in this regard,” says Stefania Bidoli, tax adviser for Luxembourg and German residents.
People often think they can choose Luxembourg civil law to avoid inheritance tax in other countries. This is misguided: you can opt for a different civil law, but not the tax law.Stefania Bidoli
Civil law, tax law
Civil law determines the heirs and the percentage of the inheritance due to them, while tax law determines the amount that will have to be paid on the inheritance. Under Luxembourg civil law, the spouse is not a ‘protected heir’ for whom a portion of the estate is reserved. In contrast, in Germany, the spouse is a protected heir and cannot be disinherited. As far as the children are concerned, they must receive a reserved portion of the estate, in Luxembourg and neighbouring countries.
The situation is more complex when it comes to tax law: “Other criteria are taken into account,” explains Anne-Lise Grandjean.
If the deceased is resident in Luxembourg at the time of death, Luxembourg applies inheritance tax on all the deceased’s movable and immovable assets located in Luxembourg. Immovable assets located abroad are exempt from Luxembourg tax. Anne-Lise Grandjean
The position is different in Germany, France and Belgium: “In these three countries, inheritance tax is applied on all the deceased’s assets, whether these are located in the country or abroad, including Luxembourg.” Consequently, as Luxembourg has not signed any double-taxation treaties in relation to inheritance tax, tax may be due in different countries on the same assets. “Cases of double taxation do not often occur in Luxembourg,” says Anne-Lise Grandjean. “Double taxation will only apply if the heirs are not direct descendants of the deceased, since in Luxembourg, there is no inheritance tax between parents and children on the statutory reserved portion.”
The position in France
Like Luxembourg, France applies inheritance tax if the deceased is a French resident. Two other situations trigger inheritance tax in France: when the movable or immovable assets are located in France, and when the heirs of a foreign inheritance are French residents. Direct-line inheritance tax in France can be as high as 45%. “However, an important point is that, for inheritance tax purposes, France considers a person as a French resident only if they are resident in France and have been in the country for a minimum of six out of the last ten years,” explains tax adviser Anne-Lise Grandjean. “A simple solution to avoid inheritance tax in France would be to transfer your assets before the heirs are considered as French tax residents from the inheritance point of view.”
One possibility is to transfer the bare ownership (the ownership of an asset), but not the usufruct (the benefit of its use), directly to your children during your lifetime. Anne-Lise Grandjean emphasises that “The gift tax applicable on the gift of bare ownership is calculated on the basis of the age of the usufructuary (the beneficial owner).”
The older the beneficial owner, the less time he or she will have to enjoy the asset, hence the value of the usufruct is smaller. This means that it is preferable to transfer the bare ownership of an asset as early as possible to reduce the taxable base. Anne-Lise Grandjean
However, as Stefania Bidoli points out: “It should not be forgotten that, once given, the donor no longer owns the asset and is no longer in a position to take decisions about it.”
Another possibility is to take out a life assurance policy, “Since premiums paid before the age of 70 do not form part of the value of the deceased’s estate and will be taxed at a lower rate than French inheritance tax.”
The position in Germany
Germany applies inheritance tax on the entire estate if the deceased is a German resident, if the heir is a German resident or if they are of German nationality and have left Germany within the last five years. Inheritance tax is also payable if neither of them is a German resident but the estate concerns ‘German assets’.
However, there are some exemptions that reduce the amount of inheritance tax payable in Germany. “Every ten years, a parent may gift 400,000 euros to a child, tax-free,” explains Stefania Bidoli. Another option, as in France, is to gift an asset with a usufruct.