How to calculate taxes on an inherited estate

Luxembourg's tax legislation distinguishes between 2 kinds of taxes on inherited assets:

  • inheritance tax: inheritance taxes apply, in principle, to the value of all the wealth – movable and immovable assets – acquired or collected in the estate of a Luxembourg resident. A Luxembourg resident is any person who has established their domicile or seat of wealth in the country;
  • transfer tax: transfer tax is levied on the value of immovable assets situated in Luxembourg, acquired or collected as property or usufruct from a deceased person whose most recent domicile or seat of wealth was not in Luxembourg.

Who is concerned

Inheritance or transfer taxes on inherited property are payable, in principle, whether or not the heirs or legatees are resident in Luxembourg.

Preliminary steps

To determine the amount of inheritance tax or transfer tax on the estate, heirs and universal legatees must file a declaration of inheritance or transfer on death with the Registration Duties, Estates and VAT Authority (Administration de l'enregistrement, des domaines et de la TVA – AED). The AED will then send a request for payment of the taxes owing.

How to proceed

Inheritance taxes following the death of a person whose most recent domicile was in Luxembourg

If the most recent domicile of the deceased was in Luxembourg, the estate will be taxable in Luxembourg (inheritance taxes), with the exception of real estate outside the country. No inheritance taxes will be levied on immovable property located abroad that is part of the estate of a Luxembourg resident.

Calculation of inheritance taxes

Inheritance taxes are calculated on the net value of the estate left by the deceased, also referred to as the ‘net estate’.

Inheritance taxes are calculated on the basis of:

  • all movable assets (furniture, vehicles, shares, cash, paintings, and so on) whether located in Luxembourg or abroad;
  • immovable property located in Luxembourg.
Under certain conditions, no inheritance taxes are levied on movable property located abroad, on which inheritance taxes are collected in the country where the property is located, because of the deceased's nationality.

The following liabilities are then deducted from the estate's assets:

  • debts payable at the time of death, and any interest on those debts (for example: private debts, professional debts, unpaid taxes, etc.);
  • the cost of the deceased's funeral.

In principle, all assets will be valued at market value as of the date of death. However, there are special rules in place for the valuation of:

  • income from emphyteutic leases;
  • income from perpetual land leases;
  • life annuities and recurring payments;
  • value of assets where the estate is split up (i.e. usufruct or freehold ownership without the right of usufruct).
Example:

Publicly traded shares are valued at their market price on the day of death. Immovable assets are valued based on the probable sale value on the day of death. It may be necessary to call in an expert or determine the value by comparison with similar immovables sold recently.

If the deceased was married at the time of death, the inheritance includes:

  • their personal, separate property; and
  • their share of the joint property.

The determination of separate property and joint property depends on the couple's marital arrangements.

Donations and transfers for consideration made shortly before death – Contract containing a stipulation for the benefit of a third party

In principle, inheritance taxes are not applied to assets donated or transferred by the deceased to one or more of their heirs.

Nevertheless, in certain cases, such donations, transfers for consideration, or contracts containing stipulations benefiting a third party may be reinstated into the value of the estate in order to calculate inheritance taxes – for example:

  • assets:
  • movable or immovable assets:
    • transferred for consideration or sold by the deceased less than 3 months before their death;
    • to a relative (parents, children, spouse); and
    • with retention of usufruct or stipulation of abandonment of a life annuity for their benefit;
  • the value of life assurance for the benefit of a third party (a policy containing a stipulation for the benefit of a third party) constitutes an asset of the deceased's estate for the purpose of calculating estate taxes.

Inheritances exempt from inheritance taxes

Inheritances exempt from inheritance taxes include:

  • everything that is amassed or acquired in the direct:
    • descending line (from parents or grandparents to children, grandchildren, etc.); or
    • ascending line (from grandchildren or children to parents or grandparents). The exemption is, however, limited to the legal part of the inheritance;
  • everything that is amassed or acquired between spouses or partners with or without one or more children born of their union or the descendants of those children;
  • everything that is amassed or acquired by the surviving spouse or partner in the estate of the spouse or partner who died first:
    • as usufruct; or
    • as a pension or recurring payment;
    • if, through the spouse or partner who died first, the children or descendants from a previous marriage or partnership have acquired the property or are responsible for the pension or recurring payment;
  • estates whose values, excluding debts, do not exceed EUR 1,250;
  • immovable assets located abroad and, under certain conditions, movable assets located abroad.

For these measures to be applicable to civil partners, they must be bound by a declaration of partnership filed at least 3 years prior to the commencement of the inheritance procedure.

Inheritance tax rates

Inheritance taxes vary depending on the family relationship between the deceased and the heir, and also the amount of property collected.

The tax rate is calculated based on the net share collected by each heir. To determine the applicable rate, a distinction must be drawn between:

  • the legal portion (which is collected by the heir on the basis of the inheritance provided for by law); and
  • the extra-legal portion (which is collected by the heir on the basis of extra-legal provisions, such as wills).

Finally, the applicable rate is composed of a base rate and an increase to the base rate.

Inheritance tax base rate
  Base rate for the legal portion Base rate for the extra-legal portion
Direct line (ascending or descending) 0 % 2.5 % or 5 %*

Between spouses with or without common children or descendants

Between partners bound by a declaration of partnership, filed at least 3 years before the commencement of the inheritance procedure, with or without common children or descendants
0 % 0 %
Between siblings 6 % 15 %
Between uncles or aunts and nephews or nieces 9 % 15 %

Between adopter and adoptee (in simple adoptions)

9 % 15 %
Between great-uncles or great-aunts and great-nephews or great-nieces 10 % 15 %

Between adopter and descendants of the adoptee (in simple adoptions)

10 % 15 %
Between all other persons 15 % 15 %

* If a direct heir receives portions to which they would not normally have been entitled, they will have to pay a:

  • 2.5 % duty on the disposable portion that is bequeathed to them by preference and beyond their share; and
  • 5 % on the surplus.
For any inheritance procedure commencing before 1 January 2018, a base rate of 5 % is applicable between spouses, or partners bound by a declaration of partnership filed at least 3 years before the inheritance proceedings, if they have no common children or descendants.
Increases to the base rates

The basic inheritance tax rates indicated above are increased if the net taxable value of the portion collected by the beneficiary exceeds EUR 10,000. The following scale is applied:

Value of estate assets
Additional charge
between EUR 10,000 and EUR 20,000

1/10

between EUR 20,000 and EUR 30,000

2/10

between EUR 30,000 and EUR 40,000

3/10

between EUR 40,000 and EUR 50,000

4/10

between EUR 50,000 and EUR 75,000

5/10

between EUR 75,000 and EUR 100,000

6/10

between EUR 100,000 and EUR 150,000

7/10

between EUR 150,000 and EUR 200,000

8/10

between EUR 200,000 and EUR 250,000

9/10

between EUR 250,000 and EUR 380,000

12/10

between EUR 380,000 and EUR 500,000

13/10

between EUR 500,000 and EUR 620,000

14/10

between EUR 620,000 and EUR 750,000

15/10

between EUR 750,000 and EUR 870,000

16/10

between EUR 870,000 and EUR 1,000,000

17/10

between EUR 1,000,000 and EUR 1,250,000

18/10

between EUR 1,250,000 and EUR 1,500,000

19/10

between EUR 1,500,000 and EUR 1,750,000

20/10

over EUR 1,750,000

22/10

Example

The deceased is a single, childless man whose parents are also deceased.

He bequeaths his entire estate to his only sister.

The total net amount of the estate is EUR 550,000. The applicable base rate is 6 %, plus 14/10 since the estate is worth EUR 550,000.

Taxable amount: EUR 550,000


Calculation of applicable rate:
• base rate = 6 %
• increase = 14/10 (140%)
• applicable rate = 6 % + (6 % × 1.4) = 14.4 %


Inheritance tax due: EUR 550,000 × 14.4 % = EUR 79,200.

Example

A family consists of 3 single brothers without children. The deceased (brother A) bequeaths his entire estate to brother B in his will, and brother C inherits nothing.

The total net amount of the estate is EUR 600,000.

The following rates apply to brother B, who received the entire inheritance:

Base rate:

  • on the first half, which corresponds to what he would have received as the legal portion (half the estate in this case), brother B will have to pay 6 % inheritance tax;
  • on the amount in excess of the legal portion (the other half of the estate), he will have to pay 15 % inheritance tax.

Increase:

14/10 (140 %)

Applicable rates:

  • on the legal portion: 6 % + (6 % × 1.4) = 14.4 %;
  • for the remainder: 15 % + (15 % × 1.4) = 36 %.

Inheritance tax owed:

EUR 300,000 × 14.4 % = EUR 43,200

EUR 300,000 × 36 % = EUR 108,000

In principle, inheritance taxes must be paid within 6 weeks of the serving of the request for payment by the Registration Duties, Estates and VAT Authority.

Transfer taxes following the death of a person whose most recent domicile was not in Luxembourg

If the deceased's most recent domicile at the time of the death was not in Luxembourg, transfer taxes upon death are nevertheless levied on immovable assets located in Luxembourg.

For estates processed after 30 December 2009, transfer taxes upon death are on an equal footing with inheritance taxes. Thus, the treatment of inheritance taxes (rates, allowances, deduction of debts related to the property, etc.) applicable to the heirs or legatees of a deceased person who was not a Luxembourg resident is the same as for a deceased person whose most recent domicile was in the country.

Calculation of transfer taxes

Transfer taxes upon death are payable on the value of immovable assets located in Luxembourg. The basis for calculating the taxes is the market value of the property on the day of death, less the debts attached to the property.

Debts recognised as liabilities of the estate are as follows:

  • debts secured against immovable assets located in Luxembourg;
  • debts undertaken for the acquisition, improvement or conservation of immovable assets located in Luxembourg.

Other movable assets (e.g. cash in bank accounts) held in Luxembourg by a deceased person domiciled abroad are not subject to Luxembourg inheritance tax.

Inheritances exempt from transfer taxes

Inheritances exempt from transfer taxes include:

  • everything that is amassed or acquired in the direct:
    • descending line (from parents or grandparents to children, grandchildren, etc.); or
    • ascending line (from grandchildren or children to parents or grandparents). However, exemption is limited to the legal portion in the direct line;
  • everything that is amassed or acquired between spouses or partners, with or without one or more children born of their union or the descendants of those children;
  • everything that is amassed or acquired by the surviving spouse or partner in the estate of the spouse or partner who died first:
    • as usufruct; or
    • as a pension or recurring payment;
    • if, through the spouse or partner who died first, the children or descendants from a previous marriage or partnership have acquired the property or are responsible for the pension or recurring payment;
  • estates whose values, excluding debts, do not exceed EUR 1,250.
For these measures to be applicable to civil partners, they must be bound by a declaration of partnership filed at least 3 years before the commencement of the inheritance procedure.

Transfer tax rates

The base rates and the increase in the base rate applicable to transfer taxes upon death are now identical to those for inheritance taxes, set out above.

In principle, transfer taxes upon death must be paid within 6 weeks of the request for payment by the Registration Duties, Estates and VAT Authority.

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