Tax on Inheritance from Abroad - Everything you need to know
Transferring and receiving assets or funds as part of an inheritance from abroad can give rise to intricate issues involving taxation and banking. In Israel, between the years 1949-1981, an inheritance tax was in place with rates ranging from 40% to 70%. However, as of 1981, the estate tax has been abolished, and currently, there is no inheritance tax or estate tax in Israel.
Although often used interchangeably, there is a procedural difference between estate tax and inheritance tax. Inheritance tax applies to the heir after the inheritance has been received, whereas estate tax applies to the assets of the estate before they are transferred to the heir. The taxation of inheritance tax varies for each heir, depending on their relationship to the decedent. Typically, the closer the relationship between the testator and the heir, the less tax the taxpayer (heir) will be required to pay.
While Israel does not have a formal inheritance tax, in certain cases, the tax authority may impose a tax on the full value of the inheritance received. For instance, capital gains tax may be imposed when the property is sold, if the taxpayer fails to comply with the regulated and legal procedure for tax decision-making with the tax authority. Conducting such a procedure can help avoid taxation on the total value of the inheritance and instead only tax the profit, such as that obtained from the sale of the inherited property.
In recent years, there has been a growing chorus of voices advocating for the inclusion of inheritance tax from abroad in the Israeli taxation system. This push is driven, in part, by criticism of inheritances that contribute to inequality and do not align with free market principles. Proponents of inheritance or bequest tax refunds argue that it can serve as a tool to reduce societal disparities and boost state revenue in a manner consistent with international standards.
Realizing Inheritance – The Challenges
Realizing an inheritance can be a complicated process, involving numerous challenges and risks. There are several issues to consider as you begin the procedure.
Firstly, it is recommended to review the contractual agreements with banks. This includes assessing the costs associated with transferring funds, deciding whether an overseas account is necessary for transferring funds, obtaining KYC approvals (know your clients), and more.
Furthermore, it is essential to determine the optimal time to realize the inheritance and the order in which it is most profitable to realize the estate’s assets. These decisions can have a significant impact on offsetting losses or on determining the tax authority responsible for collecting taxes.
The location of the sale of the assets also has a significant impact. The choice between realizing the assets in the country where the testator died versus the country where the heir resides must be carefully considered. This decision may not be relevant for real estate, but for assets such as shares or securities, there may be different options. One way is to sell the securities in the country of origin, while another option is to transfer the securities to an account in Israel through the stock exchange clearinghouse before selling them. Each course of action can have varying tax implications.
In some cases, realizing an inheritance outside of Israel may be more beneficial in terms of taxation. However, this situation will require a series of procedures to be conducted legally to facilitate the realization of the inheritance while preventing any action on the part of the authorities that could harm the process.
Comprehensive Management of the Process of Realization of Inheritance and Reduction of Tax Payments
Our office has extensive experience in facilitating inheritance or bequest realization procedures in various countries while reducing the tax payments involved. As a result, we are well-versed in the unique procedures for realizing an inheritance in different countries and know how to navigate the differences that arise.
We provide customized services to our clients, considering the unique circumstances of each case. However, we follow a standardized approach with each client who seeks our assistance on this matter. Our commitment is to remain with our clients until the funds are safely in their bank accounts, with the maximum possible savings in terms of tax and bank fees.
Step One: Planning the Procedure and Liability of the Inheritance Tax
- Background checks: we conduct comprehensive background checks to determine the specific circumstances of each case and identify the necessary procedures, risks, and costs involved both in Israel and abroad.
- we collaborate with legal professionals in the country of origin to ensure that all necessary legal procedures are conducted, such as appointing a legal executor, submitting reports to the authorities, valuing assets, and complying with tax obligations.
- we develop a customized strategy for realizing the estate and transferring the inheritance to the heirs in Israel while optimizing tax benefits and addressing regulatory and banking considerations. Throughout the process, we work closely with our clients to provide personalized guidance and support, and we don’t stop until the money is safely in their bank accounts.
Step Two: implementation
- Realizing inheritances is a long process that needs to be carefully managed. Our firm appoints an in – office portfolio manager that is responsible for implementing the strategy and connecting all relevant parties. Sometimes the portfolio manager will be an office employee that lives in the destination country or is a native speaker (our office has staff members that live in Germany, Argentina, USA).
- We have a strong network of professionals, including CPAs, attorneys, appraisers, and brokers, in the target countries who assist us in carrying out the necessary legal and financial procedures. Our team works closely with these professionals to ensure that all aspects of the inheritance are handled efficiently and effectively.
- We Manage the relationship between all relevant heirs.
- We Preform the proceedings facing the Tax Authority in the testator’s state of residency and facing the Tax Authority in Israel, with the goal of maximizing tax savings while fully complying with all legal requirements in the countries involved in the inheritance portfolio.
- Our team provides guidance and support throughout the process of transferring the funds, including assistance with KYC procedures, banking, and reporting requirements. We are committed to providing our clients with a seamless and stress-free experience, ensuring that they receive their inheritance as quickly and efficiently as possible.
The Importance of Tax Planning in Inheritance from Abroad
So far we have shown that optimal tax planning is of great importance to avoid excessive taxation on any value of the inheritance property. Below we will demonstrate numerically how the lack of tax planning can manifest itself.
Optimal tax planning of the inheritance of a property abroad in the amount of 900,000 dollars which after several years is sold for 1,000,000 dollars, will obligate the taxpayer for a profit of only 100,000. Without optimal tax planning, the tax that the taxpayer will have to pay will be based on a profit of 1,000,000 (!) In other words – without tax planning, the tax that the taxpayer must pay in this case could be $250,000 instead of $25,000. Hence the importance of optimal tax planning is clear. This part of the tax planning is called STEP-UP and in order to achieve it, you need to contact the professional division of the Tax Authority in order to obtain a tax permit preliminary.
Inheritance Tax – Global Comparison
The imposition of inheritance taxes is a common practice in many countries, including the United Kingdom, where a tax of up to 40% is imposed on the value of the inherited property. In the United States, the inheritance tax is also up to 40%, calculated based on progressive tax rates. In Germany, the inheritance tax can reach up to 30%, and in Japan, it can go up to 55%. On the other hand, countries such as Croatia and Italy have a lower inheritance tax of up to 5% and 4%, respectively.
Additionally, forced inheritance management policies exist in some countries, which restrict the division of the estate and require the inheritance to be transferred to certain relatives. For instance, in Spain, if the deceased was married, 50% of the inheritance must go to the spouse, and the rest is divided according to a set of rules that may vary between autonomous communities.
Although there is currently no inheritance tax in Israel, it is possible that one will be imposed in the future, considering that most OECD countries have such a tax and the government’s efforts to reduce its debt.
Our firm has established strong partnerships with accountants and lawyers worldwide who provide valuable assistance in analyzing different cases, enabling us to gain a comprehensive understanding of the legal situation in the country of origin and determine the most effective tax-saving strategies. In addition, our clients can easily schedule a phone call with one of our tax experts on short notice.