What tax is payable by an Israeli who receives an inheritance from overseas?
Question:
A relative of mine living in the U.K. recently passed away, and I have been informed that I am due to receive an inheritance from that relative. I have also heard that since I live in Israel, I will be taxed on that inheritance, since Israel is now applying world wide tax on its residents.
Please update me.
Concerned Israeli resident.
Sent (September 1, 2007)
Answer:
By: ACL
Dear Concerned Israeli resident:
I am sorry to hear about the recent passing of your relative.
Regarding your concern of the inheritance being taxed by the Israeli Tax Authorities - You have no need to worry. Any inheritances received by an Israeli resident are not taxed. However, the sale or any future income or gains arising from that wealth will be taxable, since the implementation of the recent tax reforms aimed at taxing the worldwide income of all Israeli residents. If your U.K. relative had left the inheritance to you contained in a trust, rather than leaving it to you directly, there is a definite possibility that the future income and gains arising from that wealth would have been outside of the Israeli tax net.
Another tax which I need to bring to your attention is the U.K. Inheritance Tax. This is a tax levied on the estate of a person domiciled and resident in the U.K. or on the U.K. based assets of a non-U.K resident. The rate of tax is 40% of the value of the estate that exceeds the nil-rate band, which is exempt. The value of this nil-rate band is currently £300,000. You will probably see that when you finally receive the inheritance from the executors of the estate, that they will have already paid this tax before winding up the estate. Unfortunately, at this point, there is nothing that you could do to mitigate the payment of this inheritance tax.
Should a person wish to plan to avoid this U.K. Inheritance Tax, there are legal mechanisms which he could utilize during his lifetime which would mitigate this tax. However, they are complex, and take up to eight years to implement. These strategies could enable him to reduce and to avoid this tax, to receive an annual tax free income for many years, as well as providing him an annual income for the rest of his life. There is a wise quotation that “anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the treasury; there is not even a patriotic duty to increase one’s taxes.”
In conclusion, your inheritance can be received tax free in Israel. However a U.K. domiciled & resident person should plan his affairs in such a manner as to minimize the effects of the U.K. Inheritance Tax, thereby leaving a greater portion of his wealth to his family.