Nefesh BNefesh

The following article, written by Leon Harris, appeared in the Jerusalem Post on February 9, 2010. The full text of the article appears online at: http://www.jpost.com/Business/BusinessFeatures/Article.aspx?id=168261      

Can 80% tax on inheritances be avoided? Can zero Israeli tax be achieved without a ruling?    

Readers of this column reacted in very large numbers to an article about inheritances from abroad in The Jerusalem Post on January 11, 2006. So potential heirs in Israel and their donors/bequeathers living elsewhere will be interested to know there has been an important development.

What’s the problem?

As a matter of public policy (“soak the rich”), many countries impose an estate tax or inheritance tax upon death, as well as tax on lifetime gifts, subject to various rules and exemptions. These taxes can bite into the family wealth in a big way.

For example: 40 percent in the United Kingdom; about 24% in Canada (capital-gains tax), depending on the province; 20% in South Africa; and up to 60% in France, apparently. In the United States, there is no federal estate tax in 2010, but it is scheduled to return with a vengeance at rates ranging up to 55% in 2011, not to mention state estate taxes.

What about Israel?

It is wrong to say that Israel does not tax inheritances. It is true that Israel abolished its estate tax in 1981. However, Israel imposes capital-gains tax on Israeli residents who sell inherited assets anywhere in the world, applying the cost basis of the last person that paid full consideration for those assets.

For example, Isaac lives in Israel and now inherits a house in London from his late father, Abraham, that cost £100,000 in the 1960s and is now worth £1 million. Let’s suppose the UK estate nil-rate band (the exempt amount) has been used on other gifts and bequests; in such a case, the UK inheritance tax may amount to £400,000 (40%).

Isaac then decides to sell the house and cash in his £1m. He will have 30 days to report and pay Israeli capital-gains tax on the capital gain of £900,000 – at rates ranging from 20% to 45%. The 20% rate applies to the post-2002 portion of the inflation-adjusted gain (see below) on a time-split basis. But rates ranging up to 45% currently apply to the pre-2003 portion of the gain.

In other words, a combined tax burden of more than 80% tax is easily possible in the two countries. This problem applies to assets situated in any country with an estate/inheritance tax, not only the UK, regardless of where the donor/deceased resided. There is no provision in Israeli law or most tax treaties that expressly grants a credit for foreign estate/inheritance taxes against Israeli capital-gains tax. This is like mixing apples and oranges.

To add insult to injury, the capital gain will be calculated for Israeli tax purposes in new Israeli shekels and adjusted for inflation according to the Israeli consumer-price index. Only the post-1993 inflationary gain is exempt: i.e., an additional 10% tax will be imposed on the pre-1994 inflationary gain!

To read the continuation of this article, please see the following link which appeared in the Jerusalem Post on February 9, 2010: http://www.jpost.com/Business/BusinessFeatures/Article.aspx?id=168261 

Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.

As always, consult experienced tax advisors in each country at an early stage in specific cases. Leon Harris (leon.hcat@gmail.com) is an international tax specialist at Harris Consulting & Tax Ltd.

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