Estate planning is an important aspect of financial management that involves preparing for the distribution of your assets and property to your beneficiaries after you pass away. However, for those with cross-border assets, the impact of inheritance tax can be significant and complex. Understanding the implications of inheritance tax on your cross-border estate plan is crucial to ensure that your assets are distributed according to your wishes and minimize the tax burden for your beneficiaries.
First, let’s take a look at what Inheritance tax is.
What Is Inheritance Tax?
Inheritance tax refers to the tax levied on a person who inherits any property or money of a deceased person. In many cases, the ancestral property becomes a source of income like rent, etc. so the income from such cases must be declared and tax must be levied on it.
But it is different from an estate tax. The person who pays the tax is the key distinction between inheritance and estate taxes. Estate taxes, in contrast to inheritance taxes, are assessed against the estate, regardless of who receives the deceased person's assets.
Inheritance Tax On Cross-Border Assets
It is important to understand the inheritance tax laws of different countries if you have assets in multiple countries. The rules of inheritance are different from state to state so it is necessary to know what they are for good estate planning.
For example, In India, there is no tax on inherited property. According to the Income Tax Act 1961, an inherited property, whether movable or immovable, is exempted from tax. But if the new owner decides to sell the property then the tax will be levied on such a sale.
In the U.K., the basic inheritance tax rate is 40%. However, such a tax rate will only be applicable when the value of the property exceeds £325,000, which is the tax-free limit. However, there are some exemptions and reliefs that can reduce the amount of inheritance tax that is payable.
In the U.S, inheritance tax is assessed by the state where the person lives or the property is situated. In addition, some states have their own inheritance tax rules. These states include Iowa, Maryland, Kentucky, Nebraska, Pennsylvania, and New Jersey.
Preparing For A Good Cross-Border Estate Plan
As we saw, every country has a different policy on inheritance tax. The best advice is to study the inheritance tax laws of different countries. You can incorporate many strategies for your cross-border estate plan. You can look into setting up a trust as under a specific limit, it is not taxable.
Another strategy is to give those assets as a gift as they are also exempted for tax purposes under a limit. You can also seek advice from a professional who can help you prepare a good plan for your cross-border estate plan.
Inheritance tax can have a significant impact on your cross-border estate plan. It is important to understand the inheritance tax laws in the countries where you hold assets and to plan accordingly.