OLN

inheritance

On Death and Taxes Around the World

by

“Nothing can be said as certain except death and taxes” is the phrase attributed to Benjamin Franklin, US Founding Father and polymath. To avoid adding insult to injury, we would recommend trying to avoid taxes after death.

The US Treasury reported on 28 February 2023 that an amount of US$7 billion for “estate and gift taxes” was collected on that day, the highest amount collected since at least 2005. Privacy rules prohibited the disclosure of further details but speculation was rife about the identity of the person(s) who may have had to make this payment, either as a deposit as part of advance estate planning (to avoid having to pay an even higher amount in the future) or a delayed payment by a late billionaire, possibly due to an enforcement action.

Hong Kong abolished estate duty on 11 February 2006. Thereafter, no estate duty affidavits and accounts have been required and no estate duty clearance papers have been needed for the application for a grant of representation in respect of deaths in Hong Kong.

However, in the United Kingdom, inheritance tax (IHT) is still applicable. IHT is charged at 40% on the value of an estate above the nil-rate band, which is currently set at £325,000 per person. Any unused nil-rate band can be transferred to a surviving spouse or civil partner, effectively giving one person a £650,000 nil-rate band. There are various useful exemptions and reliefs available to reduce the IHT liability. For example, if everything is bequeathed to a surviving spouse or civil partner, a charity or a community amateur sports club, then IHT would not be payable.

For citizens and residents of the United States, the federal estate tax exemption for 2023 is US$12.92 million per individual (US$25.84 million per married couple). The highest federal estate tax rate is 40%. Many US states also impose their own estate or inheritance taxes, with exemption levels and rates at varying rates. There are no state estate taxes payable in 33 of the 50 statues, such as Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware or Florida, just to name a few.

In Canada, there is no federal estate tax or inheritance tax. However, upon death, there is a deemed disposition of all capital property, which can trigger capital gains taxes payable by the estate of the deceased. The deceased’s final tax return must report all capital gains and losses, as well as regular income. The top marginal tax rate in Canada can reach a whopping 54% depending on the province.

In the European Union, estate and inheritance tax rules differ significantly across member states. 19 of 27 EU countries still levy some form of death tax. 8 EU countries (Austria, Cyprus, Estonia, Latvia, Malta, Romania, Slovakia and Sweden) have abolished inheritance taxes. The applicable rules and exemptions vary widely depending on the specific country, the relationship between the deceased and the beneficiary and the size of the estate. Tax rates also vary widely, from 0-20% in Poland to 7.65-87.6% in Spain.

Taiwan has a progressive inheritance tax from 10-20% on assets exceeding a certain threshold, currently set at NTD13.3 million, with exemptions and deductions available for heirs and funeral expenses.

Singapore has no estate, inheritance or capital gains tax but stamp duty may be payable upon the transfer of company shares in a Singapore company.

Macau, a special administrative region of the People’s Republic of China like Hong Kong, also has no inheritance tax.

Mainland China once issued a draft rule on inheritance tax in 2002 but a statute has never been passed. There are currently no estate, gift or inheritance taxes.

By contrast, it was reported in 2021 that the estate of Samsung Electronics chairman Lee Kun-hee will have paid more than 12 trillion won (US$10.78 billion) in inheritance taxes as South Korea has one of the highest rates of inheritance tax in the world. A premium can be added to a deceased’s ownership of shares that comprise a controlling interest in a company, potentially topping the standard 50% inheritance tax. It was reported that Mr Lee’s collection of fine art including works by Chagall, Gaugin, Miro, Monet and Picasso will be donated to the National Museum of Korea to help relieve some of the tax burden.

The taxation of estates and inheritances varies widely around the world, with some jurisdictions like Hong Kong abolishing them altogether while others maintain complex systems of deduction, exemptions and increasing marginal rates. As individuals plan their financial affairs and legacies, it is important to stay up-to-date with the estate and inheritance tax landscape in relevant jurisdictions. Careful estate planning can help to eliminate or at least minimise the tax burden on heirs and ensure a smooth transition of wealth across generations. Whilst death and taxes may be a certainty, taxes after death can be skilfully avoided with professional guidance.

Disclaimer: This article is for reference only. Nothing herein shall be construed as legal advice, whether generally or for any specific person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

Succession of Chinese Nationals of the HKSAR Estate in Mainland China

by

Introduction

It is quite common for Hong Kong permanent residents to acquire property or keep bank accounts in Mainland China (PRC). Since Hong Kong and the PRC has different legal systems, sometimes Hong Kong citizens may have concerns if they plan to bequeathing such properties to their family or loved ones after they pass away.

In this article, we shall explore the matter of succession of estate in the PRC by looking into three different hypothetical scenarios and a discussion on some relevant statutory provisions in the PRC which may affect the estate succession.

Inheritance succession of deceased’s estate in the PRC

When dealing with cross-border estate inheritance, it is important to know which country’s law governs the inheritance process, and this depends on what type of asset it is. There are two main types of assets in an estate, immovable (i.e. flat, land) and movable assets (i.e. money, personal belongings). Generally succession to immovable assets are governed by the law of the place where the asset is located, while succession to movable assets are governed by the law of the deceased’s domicile at the date of death.

Scenario 1: The deceased has a will in Hong Kong governing estate in the PRC

If the deceased has a will in Hong Kong governing immovable asset in the PRC, the succession of the immovable asset is governed by the succession law of the PRC after the deceased passes away. According to the succession laws of the PRC, provided that the deceased’s will is valid, the executor of the will (once confirmed) will be responsible for the distribution of the deceased’s estate according to the will.

However, if the asset is movable, its succession is governed by the succession law of Hong Kong if the testator died domiciled in Hong Kong. According to the laws of Hong Kong, given that the will is valid, the executor of the will appointed (or named in the last will) has to apply for the Grant of Probate of the will at the Probate Registry in Hong Kong. If the grant is successful, the executor can distribute the deceased’s estate according to the will.

Scenario 2: The deceased does not have a will in Hong Kong but leaves assets in the PRC

If the deceased does not have a will (i.e. died intestate) and leaves immovable assets in PRC, the inheritance of the estate is governed by the succession laws of the PRC after he or she passes away. The order of priority of the inheritance is governed by Part 6 of the People’s Republic of China’s new Civil Code, which states that the successors first in order includes spouse, children and parents and the second in order includes siblings, paternal grandparents and maternal grandparents. When the succession starts, the first in order shall inherit to the exclusion of the successor(s) second in order, and the successor(s) second in order shall inherit in default of any successor first in order. Generally, successors with the same priority shall inherit in equal shares unless an agreement to take unequal shares is reached amongst themselves.

If there are movable assets in the PRC, the inheritance of the estate is governed by the succession law of Hong Kong if the testator died domiciled in Hong Kong. Generally, the order of priority of the right to apply for a Grant of Letters of Administration governed by Rule 21 of the Non-Contentious Probate Rules (Cap. 10A) is as follow:

  1. the spouse of the deceased;
  2. the children of the deceased;
  3. the father or mother of the deceased;
  4. the brothers and sisters of the deceased or the children of any deceased brother or sister of the deceased.

After the grant is made, he or she will become the administrator and will be responsible for performing the administrator’s duties including the distribution of the deceased’s estate according to the order of priority provided by the Intestates’ Estates Ordinance.

The order of priority for inheritance without a will in the PRC is slightly different from that in Hong Kong. Comparatively, it is much more difficult for parents of the deceased in Hong Kong to inherit the deceased’s estate compared to the PRC since it may only happen if the deceased has no children and there are remaining assets after the spouse has his or her entitled portion distributed (if the deceased has a spouse).

Scenario 3: The deceased has both a will in Hong Kong and the PRC governing a specific PRC asset

There is no restriction on having wills in two different countries. However, matters may be complicated if there are conflicts between them. If there is any conflict (E.g. the wills give different instructions for the succession of the same PRC asset), according to Article 1142 of the succession law of the PRC, where several wills are made and the contents conflict with each other, the one made last in time shall prevail. For instance, if the deceased have both a will in Hong Kong and in the PRC giving conflicting instructions on the disposal of the same PRC asset, the matter of which will should prevail depends on when each will was made. The latest will governing would prevail and replace the other. Please be reminded that if the law governing the two wills are different, the rule aforementioned may not apply and you are recommended to seek further legal advice for such a case.

Statutory provisions that may affect the estate succession in the PRC

Some statutory provisions in the PRC may affect the process of estate succession. Marriage Law is one of the examples.

On a basic reading of Article 41 of the Marriage Law of the People’s Republic of China, it would appear that if the husband and wife incurred debts during their marriage, at the time of divorce such debts should be repaid by them jointly. If their joint property is not enough to pay off the debts, and no agreement can be made between the two parties regarding such payment of debts, the court shall determine how the debts are repaid.

Disclaimer: This article is for reference only. Nothing herein shall be construed as legal advice, whether generally or for any specific person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.