Risk of double taxation in German-British inheritance cases
Pursuant to § 2(1) ErbStG (unlimited tax liability), Germany taxes all worldwide transfers, if either the deceased at the time of his death or the beneficiary at the time of the acquisition is a German tax resident (Inländer),
If neither the deceased nor the beneficiary is a German (deemed) tax resident, the beneficiary will generally only be subject to German Inheritance Tax based on the German domestic property (Inlandsvermögen); this is generally referred to as limited tax liability (beschränkte Steuerpflicht) or situs taxation.
There is no double taxation agreement between the UK and Germany regarding inheritance and gift tax law. The existing German-British double taxation agreement only covers taxes on assets and income. There is therefore a risk that both Germany and the UK will tax the transfer of assets upon death (risk of double taxation).
Example: Testator E, an exclusively UK national, dies with his sole residence in the UK. At the time of death, he was a long-term UK resident (LPR). He bequeaths a house in London and the balance of a bank account at a bank in London to his children K 1 and K 2, who live in Germany. The UK taxes the worldwide transfer of assets based on the testator's status as an LPR. Germany taxes the assets acquired by K 1 and K 2 because they are resident in Germany.
Unilateral Relief under German Domestic Tax Laws
German tax law allows UK inheritance tax to be credited under the conditions set out in § 21 ErbStG. According to § 21 ErbStG, this requires that
- at least one party involved is subject to unlimited tax liability,
- the acquisition includes foreign assets, and these are taxable in Germany and abroad,
- the foreign tax corresponds to the German inheritance tax,
- the foreign tax was assessed and paid abroad,
- the German tax arose within 5 years of the foreign tax arising, and
- an application for unilateral relief (Anrechnung) was made.
Under certain circumstances, the credit may be limited in amount (maximum credit amount).
Unlimited tax liability of at least one party involved
The foreign inheritance tax can only be credited if at least one of the parties involved is subject to unlimited tax liability within the meaning of § 2(1) No. 1 ErbStG. In the case of limited inheritance tax liability, a credit against German tax pursuant to § 21 ErbStG is therefore not possible.
Note: If a credit is not possible in Germany, it should be checked whether a credit of the German tax against UK inheritance tax is possible.
UK inheritance tax is a tax corresponding to the German tax
Unlike German inheritance tax, UK inheritance tax is levied on the undivided estate. Nevertheless, UK inheritance tax can in principle be credited insofar as it is borne by the taxpayer. See cf. ErbStR R E 21 (1) sentence 1.
Example: In the initial case, the executor pays the equivalent of EUR 200,000 in UK inheritance tax from the estate. The beneficiaries, K 1 and K 2, each receive 1/2 of the remainder. Each can have 1/2 of the UK inheritance tax, i.e., EUR 100,000, credited.
The acquisition is taxable in Germany and abroad
A further prerequisite for a credit under § 21 ErbStG is that the acquisition is taxable in Germany and England. The foreign assets may therefore not be fully tax-exempt in Germany. Partial exemptions (e.g., household goods, § 13 (1) No. 1 ErbStG) or a lower valuation in Germany (BFH 10.7.63, HFR 64, 12) are, however, harmless.
Foreign assets
Only the tax incurred abroad on the foreign assets is credited. What is meant by “foreign assets” depends on the situation:
- If the deceased was a German tax resident (Inländer), only domestic property (Inlandsvermögen) that is attributable to a foreign country is considered foreign assets.
- If the deceased was not a German tax resident (Inländer) at the time of death, § 21 (2) No. 2 ErbStG defines foreign assets as all assets except for domestic property (Inlandsvermögen).
The assets of the type specified in § 121 BewG do not include, in particular
- the balance of a checking or savings account,
- securities in an investment or brokerage account,
- movable property (e.g., cars, yachts) or
- cash.
With regard to such assets, crediting is therefore only permissible if the deceased was not a resident of Germany (see also BFH, judgment of June 19, 2013, II R 10/12; BFH decision of January 16, 2008, ref. II R 45/05). The regulation does not violate European law (ECJ, judgment of February 12, 2009, Ref.: C-67/08).
The beneficiary must provide evidence of the amount of foreign assets by submitting the relevant documents. See § 21 (3) ErbStG. The amount of foreign assets can be regularly verified by submitting the declaration (IHT 400).
Assessment and payment of UK inheritance tax
The credit can only be applied after the UK inheritance tax has been declared and paid. In order to avoid liquidity problems, efforts should therefore be made to ensure that the German tax is declared as late as possible after the settlement of the estate in England. For more information, please refer to the article German Inheritance Tax Return.
The beneficiary must provide evidence of the assessment and payment of UK inheritance tax by submitting the relevant documents. See § 21 (3) ErbStG. The amount of foreign assets can be regularly verified by submitting the declaration (IHT 400). Since the tax procedure is a self-assessment procedure, the assessment is replaced by proof that the declaration has not been objected to. Proof of payment of UK inheritance tax can be provided by a confirmation letter from the UK tax authority.
Our service: We represent our clients vis-à-vis the UK estate administrator and request the documents required for the credit. A list of all services offered can be found under Representing beneficiaries of an estate or trust in England and Wales.
5-year period
UK inheritance tax is only creditable if the German inheritance tax on foreign assets has been incurred within five years of the date on which the foreign inheritance tax arose.
UK inheritance tax usually arises upon the death of the testator, even if it is often not paid until much later. However, if England has taxed the transfer to an opaque trust (intransparenter Trust), the tax may not be credited due to the 5-year period (Düsseldorf Finance Court, judgment of October 25, 2016 - 4 K 2239/14 Erb).
Maximum credit amount
If only part of the estate consists of foreign assets, UK inheritance tax paid in the UK can only be credited up to a maximum amount calculated using the following formula:
German inheritance tax x (taxable foreign assets ./. total taxable assets).
Maximum credit amount for assets in different countries abroad
If the foreign assets are located in different foreign countries, this portion must be calculated separately for each foreign country.
Application for Unilateral Relief in Germany
UK inheritance tax is only credited upon application. If the deceased had assets in several countries, the application must be submitted separately for each country.
The application does not require any specific form or deadline. If UK inheritance tax is paid after the German notice has become final, this constitutes a retroactive event within the meaning of § 175 (1) sentence 1 no. 2 of the German Fiscal Code (AO), and the notice must be amended.
Unilateral Relief in the UK
Unilateral Relief in the UK
Under the Inheritance Tax Act 1984, section 159, a credit for foreign tax can be given both on death and for lifetime transfers where a foreign gift tax has been charged. To qualify for this relief, both UK Inheritance Tax (IHT) and the foreign tax must arise from the same event and apply to the same property value. The foreign tax must also be similar in nature to IHT, or must be charged on death or on lifetime gifts, to qualify for credit.
Section 159 stipulates that the amount of credit available is the sterling value of the foreign tax actually paid, converted at the exchange rate on the date of payment, but only to the extent that the tax relates to the foreign property on which IHT is also charged. Payments made in respect of interest or penalties, or any foreign tax attributable to income arising after the transfer, cannot be credited. The relief cannot exceed the amount of UK IHT charged on that specific property.
Before the credit can be finalised, proof must be provided that the foreign tax has been paid. Such proof can be in the form of the foreign tax assessment, showing clearly which assets were taxed and their values, as well as evidence of payment, such as an official receipt from the foreign tax authority.
As noted above, the credit cannot be greater than the IHT due on the relevant property. If an asset is wholly exempt from IHT, the IHT attributable to it is treated as nil. If it is partly exempt, the IHT is attributed only to the chargeable portion of the asset.
Our service: Ms. Lewis, an English solicitor (Solicitor England & Wales) and specialist in probate proceedings in England and Wales, will be happy to prepare the application for credit for German tax or work to ensure that the English personal representative submits an application.
Conclusion
The crediting of UK inheritance tax is not always fully or partially permissible. In any case, it is advisable to seek the help of a lawyer or tax advisor who has experience with UK inheritance tax. We will be happy to represent you before the inheritance tax office and prepare the inheritance tax return. If necessary, we will also represent you before the tax courts. A complete list of the services we provide can be found at Advice on German inheritance tax and gift tax with a cross-jurisdiction element with the UK.
