How to calculate taxes on an inherited estate

Last update 22.10.2019

In tax matters there are 2 categories of taxes on inherited property:

  • the inheritance tax: the amount af tax due depends on the value of the movable and immovable assets of the estate of a Luxembourg resident (any person who has established their domicile or whose wealth is primarily located in Luxembourg);
  • the transfer tax: transfer tax is levied on the value of immovable assets in Luxembourg of a deceased person whose most recent domicile or wealth was not located in Luxembourg.

Who is concerned

In principle, any heir or legatee, whether or not resident in Luxembourg, may be concerned.

Preliminary steps

To determine the amount of inheritance tax or transfer tax on the estate, heirs and certain legatees must file an inheritance or transfer declaration 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 due. Inheritance taxes vary according to:

  • the family relationship between the deceased and the heir;
  • the value of the assets collected.

How to proceed

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

Calculation of inheritance taxes

Estate assets

The assets of the estate include:

  • all movable assets (furniture, cars, shares, money, paintings, etc.), whether located in Luxembourg or abroad;
  • real estate located in Luxembourg.
Estate liabilities

The liabilities of the estate include:

  • existing debts on the day the person deceased, including all interest on those debts (for example: private debts, professional debts, unpaid taxes, etc.);
  • the cost of the deceased's funeral.
Evaluation of the estate

In principle, all assets will be valued at their market value on the day the person died. 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 own property;
  • their share of the joint property.

The determination of own property and joint property depends on the couple's marital agreements.

Net estate

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

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 some cases, the following may be reinstated for the calculation of inheritance tax:

  • donations: this concerns, in particular, any property:
  • transfers for consideration, namely:
    • 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);
      • with retention of usufruct or stipulation of abandonment of a life annuity for their benefit;
  • the contract containing a stipulation for the benefit of a third party. For example: the equivalent value of a life insurance policy made for the benefit of a third party is an asset of the deceased's estate.

Inheritances exempt from inheritance taxes

Estates exempt from inheritance tax include:

  • everything that is amassed or acquired in direct line:
    • direct descending line: from parents or grandparents to children, grandchildren, etc.; or
    • direct 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 bound by a partnership declaration registered at least 3 years before the commencement of the inheritance procedure;
  • estates whose values, excluding debts, do not exceed EUR 1,250;
  • buildings located abroad which make up the estate of a Luxembourg resident;
  • under certain conditions, movable property located abroad: there is an inheritance tax levied in the country where the property is located because of the nationality of the deceased.

Inheritance tax rates

Determination of applicable rates

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

  • the legal part: collected by the heir according to their capacity (children, spouse, brothers, etc.);
  • the extra-legal part: collected by the heir as a result of a will, donation, etc.

The applicable rate includes:

  • a base rate: fixed according to the heir's capacity;
  • an increase in the base rate: based on the value of the share received.
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 % and/or 5 %

Between spouses  

Between civil partners bound for at least 3 years by a declaration of civil partnership before the opening of the estate
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:

  • 2.5 % on the disposable portion that is bequeathed to them by preference and beyond their share;
  • 5 % on the surplus.
Special case of a succession processed before 1 January 2018: a basic rate of 5 % is applied between spouses or partners who have been declared for at least 3 years before the processing of the estate, if they are without common children or descendants.
Increases to the base rates

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

Example 1:

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 2:

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 inheritance tax of brother B, who received all the inheritance, is as follows:

  • tax base:
    • on the first half, which corresponds to the legal share (half of the estate in this case): 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 (i.e. 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

Inheritance tax must, in principle, be paid within 6 weeks of receipt of the request for payment from the AED.

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

Calculation of transfer taxes

The transfer tax following a death is calculated according to:

  • the market value of all real estate located in Luxembourg on the day of death;
  • minus any debts in relation with the building, i.e.:
    • debts secured against the real estate;
    • debts incurred for the acquisition, improvement or conservation of the real estate.

Other movable property in Luxembourg (funds in bank accounts, etc.) belonging to the deceased who had their domicile abroad are not subject to any Luxembourg inheritance tax.

For estates processed after 30 December 2009, transfer taxes upon death are on an equal footing with inheritance taxes. The tax treatment is the same whether or not the deceased had their last domicile in Luxembourg.

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
    • direct 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 bound by a partnership declaration registered at least 3 years before the commencement of the inheritance procedure;
  • estates whose values, excluding debts, do not exceed EUR 1,250.

Transfer tax rates

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

Transfer taxes upon death must, in principle, be paid within 6 weeks from the day of receipt of the request for payment from the AED.

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