Inheritance tax in Luxembourg for residents and non-residents
Inheritance tax affects how much of your legacy is passed on to your heirs. For residents and those with assets in Luxembourg, understanding is essential to ensure proper financial planning and compliance with the law. This article will explain the particularities of inheritance tax in Luxembourg to help you navigate this complex subject.
Being aware of this issue is crucial even if you are not resident in Luxembourg, particularly if part of your real estate assets or the real estate assets of your relatives who may leave you an inheritance are located in Luxembourg. These assets may be subject to Luxembourg inheritance tax.
What is legal inheritance and how to become eligible
Inheritance, legally speaking, refers to the totality of assets, rights, and obligations that are transferred to heirs following an individual's death. Inheritance in Luxembourg can be established in two primary ways: following the intestate succession order established by Luxembourgish law or through a will.
This transfer process can include both material assets (such as properties, money, and valuable items) and liabilities (debts and outstanding obligations).
In the absence of a will, heirs are designated according to the intestate succession order set by Luxembourgish law, which includes six distinct orders.
1. Children and descendants
2. The Surviving Spouse
3. Parents and Privileged Collaterals (Siblings)
4. Ordinary Ascendants (Grandparents, Great-Grandparents)
5. Ordinary Collaterals (Uncles, Aunts, Cousins)
6. The Luxembourgish State
Designated heirs can accept the inheritance outright, accept it subject to inventory (which accounts for both assets and liabilities), contest it, or renounce it.
Last will and documents needed for inheritance
If there is no will, the succession will be resolved according to the legal orders of succession previously discussed. However, an individual can make a will to alter the legal order of succession and give preference to certain persons. It is important to consider a few key points regarding who can make a will and what assets can be disposed of in a will.
A person must be capable of validly and freely expressing their wishes. Therefore, they must be at least 16 years old and of sound mind. A will made by someone under guardianship would be invalid. Similarly, a will made by a person who, while not under guardianship, was suffering from mental incapacity or weakness of mind at the time of making the will, would also be invalid.
When drafting a will, it is crucial to know what part of the estate can be disposed of. Certain individuals are protected by law and are entitled to a portion of the inheritance that cannot be deprived, known as the inheritance reserve. The part that can be freely disposed of is called the available quota.
Under Luxembourgish law, only the descendants of the deceased (children or, if the children predeceased, their children) are entitled to the reserved portion.
The reserved portion amounts to half of the legal inheritance if the deceased leaves one child, two-thirds if there are two children, and three-quarters if there are three or more children.
Taxes on inheritance in Luxembourg
Inheritance tax in Luxembourg is a levy imposed by the government on the transfer of assets from a deceased person to their beneficiaries. This tax is applied to the net value of the deceased's estate, which includes all properties, money, and possessions owned at the time of death.
The primary purpose of inheritance tax is to generate revenue for the government and contribute to the redistribution of wealth within society. By taxing the transfer of substantial estates, the government aims to reduce economic inequality and ensure that the wealth accumulated by one generation is not entirely transferred without contributing to public finances.
That said, there are two crucial considerations related to this point: who is subject to this tax and how the tax is calculated, so let's take a look at them.
Who is subject to inheritance tax in Luxembourg?
Understanding who is subject to inheritance tax in Luxembourg requires knowledge of the two types of taxes applied in the context of inheritances: succession duties and transfer duties upon death.
How is the inheritance tax calculated?
Calculating inheritance tax in Luxembourg involves a three-step process: determining the estate value, identifying exemptions, and applying the applicable tax rates to the inherited assets. Let’s break down each of these steps in detail.
Since there are two different taxes, succession duties and transfer duties upon death, there are also two ways to calculate the taxable estate in Luxembourg. However, in both cases, the estate includes both the deceased's assets and liabilities at the time of death, with liabilities deducted from the assets. The difference lies in which assets and liabilities are considered for each tax.
For succession duties (Residents):
- Assets: All real estate and movable assets (furniture, cars, shares, money, artworks, etc.) located both in Luxembourg and abroad.
- Liabilities: All existing debts at the time of death, including related interest, such as private debts, professional debts, unpaid taxes, and funeral expenses.
For transfer duties (Non-Residents):
- Assets: The market value of real estate located in Luxembourg at the time of death.
- Liabilities: All debts related to the real estate, including those secured by these properties and debts incurred for their acquisition, improvement, or maintenance.
Once the net value of the inheritance is established, the next step is to determine which part of the inheritance is subject to tax. Luxembourg offers specific exemptions that allow certain amounts of the inheritance to be transferred tax-free.
The following inheritances are exempt:
- The legal share of the inheritance corresponding to heirs in the direct line (ascending or descending).
- Inheritances between spouses or between partners in a registered partnership for at least three years before the succession.
- Successions with a value, minus debts, not exceeding 1,250 euros.
- Real estate located abroad that is part of the inheritance of a Luxembourg resident.
- Under certain conditions, movable property located abroad.
The final step is to determine the applicable tax rate. Inheritance tax rates in Luxembourg vary based on the relationship between the deceased and the beneficiary.
The inheritance taxation rates are applied to the net portion received by each heir, which may include a legal portion and an extra-legal portion, each subject to different rates.
| Base rate for the legal portion | Base rate for the extra-legal portion | |
| Direct line (ascending or descending) | 0% | 2.5% to 5% |
| Between spouses and civil partners bound for at least 3 years by a declaration of civil partnership before the opening of the estate | 0% | 0% |
| Between siblings | 6% | 15% |
| Between uncles or aunts and nephews or nieces | 9% | 15% |
| Between adopter and adoptee (in simple adoptions) | 9% | 15% |
| Between great-uncles or great-aunts and great-nephews or great-nieces | 10% | 15% |
| Between the adopter and descendants of the adoptee (in simple adoptions) | 10% | 15% |
| Between all other persons | 15% | 15% |
The basic inheritance tax rates increase if the net taxable value of the portion inherited by the successor exceeds 10,000 euros according to the following table.
| Taxable amount (euros) | Percentage increase from base rate |
| 10,000 – 20,000 | 10% |
| 20,001 – 30,000 | 20% |
| 30,001 – 40,000 | 30% |
| 40,001 – 50,000 | 40% |
| 50,001 – 75,000 | 50% |
| 75,001 – 100,000 | 60% |
| 100,001 – 150,000 | 70% |
| 150,001 – 200,000 | 80% |
| 200,001 – 250,000 | 90% |
| 250,001 – 380,000 | 120% |
| 380,001 – 500,000 | 130% |
| 500,001 – 620,000 | 140% |
| 620,001 – 750,000 | 150% |
| 750,001 – 870,000 | 160% |
| 870,001 – 1,000,000 | 170% |
| 1,000,001 – 1,250,000 | 180% |
| 1,250,001 – 1,500,000 | 190% |
| 1,500,001 – 1,750,000 | 200% |
| 1,750,000+ | 220% |
Navigating the intricacies of inheritance tax in Luxembourg requires a solid understanding of the legal framework and tax regulations. For personalized guidance and to ensure compliance with all legal requirements, consulting with a qualified inheritance law professional is strongly recommended. Proper estate planning and expert advice can help mitigate potential issues and ensure that your inheritance matters are handled efficiently and in accordance with Luxembourgish law.
Frequently Asked Questions (FAQ)
How can one minimize inheritance tax liability through estate planning?
What happens if an heir decides to renounce their inheritance?
What is the difference between succession duties and transfer duties upon death?
Source: guichet.public.lu, www.csl.lu, www.justarrived.lu, www.fiduciaire-lpg.lu, pfi.public.lu, www.euodia.fr, www.expatica.com, e-justice.europa.eu
We took photos from these sources: Laura Fuhrman on Unsplash
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