The rules can be complex, but knowing what will happen to your estate when you die can save a lot of trouble for you and your loved ones.
Inheritance tax (IHT) is a tax on the total value of an estate of someone who has passed away. In Luxembourg, tax rates are generally low compared to other EU countries. However, strict inheritance laws apply (the 'automatic heirship' rules).
IHT applies to all deceased Luxembourg residents. This is defined as either those who are domiciled here (i.e. Luxembourg is their permanent home), or those whose wealth is primarily located in Luxembourg.
How is inheritance tax calculated?
Inheritance tax is calculated on the basis of the net value of the estate, also known as the net estate. This is calculated as the sum of all your assets (movable and immovable), minus your liabilities.
Immovable assets refer to your property in Luxembourg.
Movable assets refer to everything else subject to IHT, such as your vehicles, personal possessions, investments and any life insurance payouts.
Liabilities include debts or tax owed, as well as funeral costs.
Upon the death of a loved one, the heirs and legatees must file an inheritance or transfer declaration with the Registration, Duties, Estates and VAT Authority (AED). This declaration will be used as the basis for determining what IHT is to be paid.
Who will inherit what?
Luxembourg has a set of automatic heirship laws, which take precedence over any wills.
Under the rules, those in the direct line of inheritance automatically inherit a portion of the estate. This includes descendants such as children, as well as ascendants like parents or grandparents.
Children take priority. If there is one child, they will inherit half the net estate. Two children will inherit a third each. Three or more will get an equal share of three-quarters of the net estate.
After children and other direct relatives, other relatives may be in line for automatic inheritance, which is referred to as the legal part of the inheritance. This can get complicated and depends on the exact composition of the family. My-life.lu have a detailed breakdown.
What rates will be charged?
The good news is that direct descendants (children, grandchildren) and direct ascendants (parents, grandparents) pay no IHT on the legal part of their inheritance.
Beyond this, the base rate is charged on the first €10,000 that someone inherits.
For siblings the base rate on the legal part is 6%. For other relatives such as aunts or uncles it is usually 9%, whereas for non-relatives it is 15%. Different rules apply for spouses, as detailed below.
After this legal part is calculated, the extra-legal part is determined. This refers to any portion of the estate not subject to the automatic heirship rules, such as what is specified in a will. The extra-legal base rate is either 2.5% or 5% for those in the direct line of inheritance, or 15% for everyone else. Again, it is charged on the first €10,000 inherited.
Above €10,000, rates apply on a sliding scale. Information on this scale and a detailed breakdown of the different rates is available on guichet.lu.
What about my spouse?
Civil partners who are bound for at least three years by a declaration of partnership are exempt from IHT on their joint estate.
In the event that there are no children, the surviving spouse will inherit the whole estate without any IHT charge.
If there are children, the position can vary based on the wishes of the deceased. Luxembourg law provides for a "special discretionary portion for the spouse", allowing the surviving spouse to either inherit a share of the estate or the entire estate 'in usufruct'. Details here.
Unlike those in the direct line of inheritance, spouses can be excluded from inheritance if a partner so wishes. In this instance, under the standard Luxembourg regime, the spouse would likely inherit half the joint estate, with the other half subject to the automatic heirship rules. This is somewhat equivalent to divorce rules.
Guichet.lu has details here on how to draw up a will and make your wishes clear.
What else might I have to pay?
Under EU law, you can choose to state in your will that you wish for the law of your country of nationality to apply to your inheritance. In practice, given Luxembourg's favourable rates this option is less desirable.
In addition, if you do this you may still be subject to transfer tax. Transfer tax also applies where the deceased was not living in Luxembourg at the time of their death. It applies to any immoveable assets, such as real estate, that the deceased owned in the country.
The rules for transfer tax are on the same footing as IHT. As with IHT, a declaration must be made to AED in order for transfer tax to be determined.
Finally, if the beneficiaries from an inheritance are not Luxembourg residents, the inheritance tax rules of their home countries will likely apply.
Can I lower my tax charge with gifts?
Yes. Assets gifted before death are not subject to IHT, although any property donated in the year prior to death may be reinstated for the calculation of IHT.