What is meant well by the testator and their solicitor can create a tax monster
English lawyers and tax consultants must beware of personal liability when designing Wills for families who either may own assets abroad or who wish to make gifts to beneficiaries living outside the UK. The harmless seeming “free of tax” wording as is commonly used by English solicitors when drafting wills for English clients can lead to unexpected quarrels between executors and beneficiaries. Why?
If a UK estate exceeds the UK IHT nil-rate band of currently £325k, HMRC levies 40% inheritance tax. From the perspective of most European countries, this is a staggeringly high tax rate. Austria, for example, knows no IHT at all. In Germany, the inheritance tax rate between close relatives starts at 7%.
Another major difference between the IHT systems of the UK and most continental EU countries is that outside the UK not the estate as such is being taxed but instead each individual beneficiary, sometimes at very different tax rates which depend on the relation to the deceased. Thus, if a beneficiary who receives a gift under an English will lives in such a country (e.g. Germany, France or Spain), that beneficiary will be subject to (additional) inheritance taxation within the country of his / her residence.
And here is where it is getting risky for English solicitors
When drafting an English will, most British solicitors will usually write:
“XY shall receive free of charge the following assets…”
From a British point of view, this means that the gift is not to be reduced by IHT. Instead, from a strictly financial perspective, the portion of UK IHT attributable to that gift shall be borne by the estate, i.e. by those beneficiaries who shall receive the residuary estate. HMRC is not concerned with who shall effectively bear the burden of IHT. From a UK perspective: So far, so good.
However, as we have seen above, if the beneficiary of a specific gift resides and lives in, for instance, Germany (and is therefore deemed to be a tax resident in Germany within the meaning of § 2 ErbStG), then that beneficiary must also pay the German IHT on the value of the gift. This is regardless of any sort of British inheritance taxes, since there is no double taxation agreement between the UK and Germany in the field if inheritance tax.
To illustrate, here is a simple case study in a British-German setting (but the problem also arises in British-French, British-Spanish etc inheritance cases):
An uncle, who is English and lives in London, in his last will gives a gift of €100,000 to his nephew who – at the date of the uncles’s death – is resident in Germany. The solicitor drafting the will includes the wording “free of any tax”. This scenario creates two legal problems:
Problem 1: The nephew (or his German lawyer) will argue that the wording “free of any tax” also applies to German inheritance tax. Under German law, the nephew only has a personal IHT allowance of €20,000, which means that the remaining amount (€80,000) is subject to German IHT. In this case (a nephew receiving €100,000), the tax rate is 20%. If the amount or the relation is different, there can be very different tax rate (detaiils of German IHT rates are explained here).
The nephew will write to the executor and request that he pay the German inheritance tax bill of €16,000. The Executor will swiftly inform the nephew that neither the deceased nor the solicitor who set up the will did have German inheritance tax in mind when drafting the will. One can already see the wonderful dispute arising because of the term “free of any tax”. If the deceased was someone who was fully aware of the fact that one has to pay personal inheritance tax in Germany as recipient of a gift, then the nephew can reasonably argue that his uncle had indeed meant “free of inheritance tax” under both regimes. If the deceased hat, on the other hand, never lived in Germany and had never heard of that German tax concept, then it is the more convincing interpretation of the will that the words “free of tax” really only mean “free of UK IHT”.
Problem 2: Although there is no double taxation agreement between the UK and Germany with regard to inheritance tax, German tax law still offers unilateral relief in certain circumstances. In our example case study, the nephew would be able to set off the respective UK IHT against his tax debt, if his gift would have been reduced by UK IHT. However, if the “free of any tax” clause is interpreted as meaning that the estate has to pay also the German IHT, then the nephew personally bears no UK IHT burden. Within the logic of German IHT, the German beneficiary can thus also NOT claim unilateral relief, i.e. he cannot be given any tax credit in Germany!
The result being that the executor has to pay both UK IHT and foreign IHT on the same gift without being able to claim any foreign tax relief. A very unsatisfactory outcome, especially for the beneficiaries receiving the residuary estate.
This simple case study shows that an English solicitor, by designing a will without the adequate knowledge of the German (French, Spanish etc) tax system can cause considerable tax harm and create great legal quarrels between the various beneficiaries.
Lawyers in different countries must therefore work together in assessing the potential tax consequences in each individual country in order to avoid any pitfalls and nasty surprises.
A possible solution with regard to Germany might be the following wording:
My nephew shall receive a gift of …. With regard to any inheritance tax that may arise in the UK, my nephew shall receive this “free of tax” i.e. the inheritance tax incurred in the UK is not to be paid out of the value of the share deposit, but from other assets. In addition, my nephew shall also receive, as further gift, a sum of money equivalent to that required for any settlement of the IHT in the UK. With regard to taxation, my nephew shall therefore bear the IHT which is attributable to the gift and shall therefore be entitled to deduct the UK IHT by way of deduction from German inheritance tax (§ 21 ErbStG).
Lawyers can create a tailor-made Last Will only if they are fully informed about the testator’s personal situation and his/her objectives. In order to draw up a Last Will that fully meets the clients individual requirements, Graf Partner LLP uses a comprehensive questionnaire and Will preparation checklist (available for download here). This checklist also helps to facilitate an effective and individual preparation for the personal meeting at the firm.
If you wish to instruct Graf & Partners LLP to draft a Will or to team up with a foreign lawyer to advise in specific areas of German or Austrian law, please feel free to complete the questionnaire and contact our German succession and probate law experts.
German solicitor Bernhard Schmeilzl also conducts inhouse seminars for British and American lawyers and accountants who advise clients with foreign assets or who have family abroad. More on these seminars here: Advising Clients with Assets Abroad
Watch our video which answers the24 most frequently asked questions on German probate and estate administration (for the list of questions see below the video)
1) What is an “Erbschein”? (00:11)
2) Is the process for hiring a German lawyer different from hiring a lawyer in the States? (00:57)
3) How much does it cost to hire a European Lawyer? (02:06)
4) My deceased relative owned property in Europe. Do I need a separate grant of probate for those assets? (03:04)
5) How does German or English probate differ from American probate? (04:01)
6) Can I be personally held liable for the debts of an international estate? (04:47)
7) What documents do I need to submit to the German and English probate courts to have access to he estate? (05:47)
8) How long does the international probate process take? (06:58)
9) Will I have to travel to Germany or England in order to access the assets my loved one land? (07:41)
10) What are the rules of intestacy in Germany? (08:22)
11) How can we sell foreign assets in an estate? (09:16)
12) How can I get access to assets in Germany or England? (10:09)
13) Who administers a foreign estate if there is no Will? (11:07)
14) How can I swear the oath or give the affidavit with regards to the probate application? (12:11)
15) How do I get an inheritance tax clearance from German and England? (13:20)
16) Is there an estate tax on foreign assets? (14:29)
17) I received a letter from German probate court because a relative has died. What do I need to do? (15:14)
18) Is a United States Will valid in Germany and England? (16:04)
19) What are “forced heirship” rules? (16:56)
20) Am I entitled to a share of the estate if a foreign relative has died? (17:53)
21) What happens if someone contests the Will in Germany? (19:01)
22) Can I act as the executor or administrator abroad myself? (19:49)
23) I have foreign assets. How can I ensure they avoid probate? (20:22)
24) What is the principle of universal succession? (21:21)
For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:
- Most Germans die without a Will (German Intestacy Rules)
- Formal Requirements to set up a valid Will in England, Scotland and Germany: What are the Differences?
- The Perils of German IHT and Gift Tax
- Workshop: Clients with Foreign Assets
- Basics of German Inheritance and Succession Law
- Executors and Trustees in German Inheritance Law
- How to apply for a German Grant of Probate
- The Infamous German Community of Heirs – And how to avoid it
- Germans Heirs are Personally Liable for Debts of the Deceased
- International Wills and Estate Planning for British-German Families
- Prove German Wills for English Probate
- Disputed Wills and Contentious Probate in Germany
- Disinherit your no-good children? Not so easy in Germany
- Don’t be afraid of Clients with Foreign Assets!
- Can foreign Taxes be set off against UK Inheritance Tax?
Or simply click on the “German Probate” section in the right column of this blog.
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The law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.