Property taxes: should you be worried? – Tax

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What is a property tax?

An inheritance tax is levied on the inherited part of an estate from an heir if the value of such inheritance exceeds an exclusion limit which has been set by the law of the country. Different countries have several variations of it, and different nomenclature, ranging from death tax, transfer tax, estate tax to inheritance tax. While there may be different people liable to pay the same thing, the bottom line is that all of these taxes are broadly similar, usually being triggered by death. In any case, the inherited estate is not received in full by the beneficiary, but a significant part of it must be paid to the state. Now, responsibility for payment, i.e. who will pay the tax, may be different in each case. Inheritance tax is levied on the net value of assets held by a deceased person on the date of death. On the other hand, inheritance tax is levied on the beneficiaries of the property. All of these taxes are usually associated with some sort of gift tax, so they cannot be avoided by simply transferring the property before death.

Usually, there are exemptions when the estate is transferred to the surviving spouse, but again, on the death of the surviving spouse, more often than not, these taxes catch up.

In some countries, applicable inheritance tax can be as high as 55% of allowable post-estate deductions, requiring the estate owner to plan well in advance.

Inheritance or estate tax regimes in some major countries:

UNITED STATES: The United States imposes an estate tax on the transfer of a deceased’s worldwide estate for its citizens and residents – meaning that in the case of persons with US citizenship, the worldwide estate is liable to pay the estate tax, whether domiciled or resident in the United States. For a person who is neither a U.S. citizen nor a U.S. resident (i.e., nonresident alien), gross estate includes only U.S. situs assets (including real estate and financial instruments) detained upon death.

US estate tax rate peaks at 40%, with estate and gift tax exemption threshold of $5.49 million per person for 2017. Exemption doubles to $10.98 million dollars for married couples filing joint tax returns. In addition to the estate tax being a federal tax, several states have a state level estate tax above the federal limit.

UK: The UK has a unified estate and gift tax system called Inheritance Tax (IHT). The IHT applies to the value of an individual’s estate at the time of his death (in which case he is deemed to be making a transfer of the entire estate immediately before that time) and to certain transfers or gifts made from living of the individual. The tax applies on the basis of the patrimonial loss of the donor resulting from the transfer of value.

The taxation of individuals in the UK is largely determined by their domicile status or sometimes by their residence status, although residence is less important for the IHT. The IHT is levied on the worldwide estate of a UK domiciled deceased. While the UK recognizes the concept of domicile as a country considered permanent residence, the IHT also applies (with some variations) to persons deemed domiciled. Deemed domiciled and non-domiciled tax laws underwent significant changes in 2017, requiring careful reassessment of even existing planning in place, if any.

IHT is also levied on assets located in the UK of a person who was not domiciled in the UK. One should be aware and plan well before looking and buying this property in London!

The standard rate of inheritance tax is set at 40% and is levied on the estate that exceeds the threshold, which is currently £325,000. If the estate is given to children or grandchildren, the threshold increases to 425,000 pounds.

Canada: Canada does not have an estate tax but after a person dies their estate is considered to pass to their spouse and if there is no spouse then the deceased is considered to have sold all of its assets. at the fair market price immediately before his death. This often results in the recognition of a certain amount of gain or loss that is included in the calculation of income in the year of death. These deemed gains are then taxed at the applicable capital gains tax rates.

Individual taxation in Canada is determined by residency. The deemed disposition on death applies to the worldwide assets of all Canadian residents at the time of death. In addition to the criteria developed by the courts, the Tax Act of Canada has provided statutory criteria that may deem a person to be a Canadian resident. In the case of an individual, the key rule is that a person is deemed to be a resident for any taxation year during which he spends 183 days or more in Canada. Separate rules apply if the person is considered a resident of more than one country.

Non-residents may also be subject to tax upon death if they own taxable Canadian property.

Status in India:

Currently, no inheritance tax is levied in India. India had the Inheritance Tax scheme from 1953 to 1985. However, it was abolished in 1985 with the realization that Inheritance Tax had failed to balance the society.4 Prior to the move, inheritance tax was payable on an installment basis ranging from 7.5% to 40% of the principal value of the estate.

It should be noted that for the past few years there has been much speculation that inheritance tax will be reintroduced in India, but no formal proposal has yet been tabled in Parliament.

Is there a silver lining?

Yes, if planned well in advance, inheritance or inheritance tax can be legitimately minimized to a significant extent. Depending on the tax incidence of each country and the assets involved, planning can vary from simple gifting to setting up complex integrated structures to provide tax efficiency. Such cases should be assessed by experts familiar with the consequences of the chosen alternatives.

When to be concerned:

As the global tax scenario becomes more dynamic than ever and governments are increasingly keen to shore up their burgeoning tax pots, it is of the utmost importance that one remains aware that certain scenarios may attract inheritance tax. or estate and plan ahead for the same. We list below some situations in which it is advisable to be more careful and to exclude the applicability of one of these levies, or alternatively, to plan the most effective payments:

  • You have or plan to acquire the citizenship of another country

  • You are proposing to buy a property in another country

  • You want to do business in another country

  • Your spouse or your children have a foreign nationality

  • Your children study abroad and can settle outside their country of origin

  • You are employed in a foreign country

  • You are likely to inherit property from someone living abroad

  • You wish to bequeath your property to a person living abroad

  • Your legal heirs are settled outside your country of origin

  • You propose to settle abroad while continuing to be a citizen of your country

This is not an exhaustive list, but more likely scenarios where, if unplanned, the estate may eventually become subject to tax, instead of passing it in full to your rightful heirs. In the event that two or more jurisdictions are involved, a better way would be to bring in experts with an understanding of multiple jurisdictions to bring out the overall tax efficiency of a person’s estate.

References

1 https://www.irs.gov/pub/irs-pdf/i706.pdf

2 https://www.gov.uk/inheritance-tax/overview

3 https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4111-canada-revenue-agency-what-after-a-death/revenue-agency -revenue-canada-what-after-a-death.html

4 http://pib.nic.in/archive/docs/DVD_46/ACC%20NO%20917-BR/FIN-1953-10-06_1502.pdf

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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