Inheritance tax: Ireland-domiciled ETF in IBKR

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Topic Author
mvb1234
Posts: 4
Joined: Fri Jan 07, 2022 6:21 pm

Inheritance tax: Ireland-domiciled ETF in IBKR

Post by mvb1234 »

Hello,

First post in this forum so happy to join the comunity :happy

My father is a Chilean citizen and lives in Chile. I'm also Chilean (and French, and about to become UK citizen too) and live in the UK.
My father has some money he's looking to invest, possibly using his Interactive Brokers (IBKR) account (in the US).
We're thinking about inheritance tax implications. We are OK to pay our fair share of tax, but obviously don't want to pay more than necessary, pay double tax, etc. We also don't want to do anything illegal.

My understanding is that investing in an Ireland/Lux domiciled ETF/mutual fund would be better to avoid US estate taxes (e.g. VUSD).

The question is what is the optimal setup in terms of inheritance tax:
- Opening a join account for the two of us, or him having an individual account?
- How does inheritance tax work, given the funds are domiciled in Ireland/Lux, but he's a resident of Chile and I am of the UK? Which jurisdiction dictates and collects the inheritance tax due?
- If my father dies, who technically pays the inheritance tax, the decesed (i.e. my father), or the person that receives the inheritance (i.e. myself)?

Any advice would be welcome :sharebeer
TedSwippet
Posts: 4040
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Inheritance tax: Ireland-domiciled ETF in IBKR

Post by TedSwippet »

Welcome.
mvb1234 wrote: Fri Jan 07, 2022 6:42 pm - Opening a join account for the two of us, or him having an individual account?
It will be much simpler and cleaner for him to have his own individual account. Joint accounts are mostly designed for married couples.
mvb1234 wrote: Fri Jan 07, 2022 6:42 pm - How does inheritance tax work, given the funds are domiciled in Ireland/Lux, but he's a resident of Chile and I am of the UK? Which jurisdiction dictates and collects the inheritance tax due?
Neither Ireland nor Luxembourg will apply estate or inheritance taxes to any ETFs domiciled there and held by non-Irish and non-Luxembourg residents. And the UK's inheritance tax applies to the person who dies, not the person who inherits. For an individual account held by your father then, the only estate or inheritance taxes that might apply would be Chilean, if any (I do not know the details of how or if Chile would tax the estate of dead residents).
mvb1234 wrote: Fri Jan 07, 2022 6:42 pm - If my father dies, who technically pays the inheritance tax, the decesed (i.e. my father), or the person that receives the inheritance (i.e. myself)?
As above. If Chile has an estate tax then that would be the only one to apply. UK residents can receive inheritances and gifts without any UK tax interference.
Topic Author
mvb1234
Posts: 4
Joined: Fri Jan 07, 2022 6:21 pm

Re: Inheritance tax: Ireland-domiciled ETF in IBKR

Post by mvb1234 »

Thank you!

My father is quite keen on opening a Joint Account, as he beleives it will be easier for me to access the funds immediately after his death. He believes otherwise I would have to go through a lengthy legal process. My understanding is that the legal process will happen anyway and that the funds will be frozen upon his death (unless I didn't tell the broker, which I won't so as I'm pretty sure it's illegal). What is your opinion on this?
Also, how would this compare vs him having an individual account and adding my name as a Transfer on Death (TOD)?


Also on the tax bit, agree that tax is probably due in Chile, and only in Chile.
It seems though that the UK doesn't tax the inheritor (but rather the estate of the deseased), so as you say this is the reason that no tax is due in the UK. However, according to my father Chile taxes the inheritor instead. As I am a UK resident, is this some kind of loophole in which I don't pay tax to anybody? Probably not but I'm a bit lost here :confused

Thank you again :beer
TedSwippet
Posts: 4040
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Inheritance tax: Ireland-domiciled ETF in IBKR

Post by TedSwippet »

mvb1234 wrote: Sat Jan 08, 2022 6:31 pm My father is quite keen on opening a Joint Account, as he beleives it will be easier for me to access the funds immediately after his death. He believes otherwise I would have to go through a lengthy legal process. My understanding is that the legal process will happen anyway and that the funds will be frozen upon his death (unless I didn't tell the broker, which I won't so as I'm pretty sure it's illegal). What is your opinion on this?
Also, how would this compare vs him having an individual account and adding my name as a Transfer on Death (TOD)?
I have never been in this position, so no real idea. This is probably a question best addressed by asking the broker directly how they would handle the assorted options.
mvb1234 wrote: Sat Jan 08, 2022 6:31 pm It seems though that the UK doesn't tax the inheritor (but rather the estate of the deseased), so as you say this is the reason that no tax is due in the UK. However, according to my father Chile taxes the inheritor instead. As I am a UK resident, is this some kind of loophole in which I don't pay tax to anybody? Probably not but I'm a bit lost here.
Assuming that your father's money here is net and after Chilean income tax, I am not sure why you feel there should be some additional tax levied on it if/when you (or somebody else) inherits. An inheritance that is free of inheritance and estate tax isn't really a "loophole". To the extent that Chile taxes beneficiaries (does it really?) and the UK taxes estates, arranging things so that the beneficiary of a Chilean estate is a UK resident looks more to me like "good planning" than loophole.

Hypothetically, what would occur in the other direction? That is, deceased in the UK and beneficiary in Chile. Would the UK first take 40% of the balance in UK inheritance tax, and then Chile take a piece of the remainder when paid to the Chilean resident beneficiary? If so, that would be "poor planning".

Finally, if inheritance tax is nevertheless a major worry for some reason, have you considered using lifetime gifts between you instead?
Laurizas
Posts: 338
Joined: Mon Dec 31, 2018 4:44 am
Location: Lithuania

Re: Inheritance tax: Ireland-domiciled ETF in IBKR

Post by Laurizas »

mvb1234 wrote: Sat Jan 08, 2022 6:31 pm My father is quite keen on opening a Joint Account, as he beleives it will be easier for me to access the funds immediately after his death. He believes otherwise I would have to go through a lengthy legal process. My understanding is that the legal process will happen anyway and that the funds will be frozen upon his death (unless I didn't tell the broker, which I won't so as I'm pretty sure it's illegal). What is your opinion on this?
Also, how would this compare vs him having an individual account and adding my name as a Transfer on Death (TOD)?
I had my individual account converted to joint account at IB because I wanted to grant access to my wife in case something bad happened to me. Since stocks are acquired during marriage, I own only 1/2 of portfolio according to my national law. While in the process, I remember something that the money from stocks sale could be transferred only to my bank account. I am not sure if the second owner can change the bank account where money should be transferred. So, in some circumstances, if there are no more heirs or heirs agree, there could be no legal process and sending documentation to IB, for example, if I die, my wife will sell our portfolio and sends money to my bank account. Money in my bank account is divided in accordance with inheritance law.
masni
Posts: 26
Joined: Thu Sep 04, 2014 5:56 am

Re: Inheritance tax: Ireland-domiciled ETF in IBKR

Post by masni »

There is a hierarchy of countries, and it depends if the two countries have tax agreements. In general, the idea is that the estate pays for the inheritance tax, in the country of the asset. To complicate matters, each country have their own rules of what is taxable and what is not.

In the case of shares, any US based shares that is inherited is subject to US estate taxes, but in the UK it is not for non resident. So for example, if your father owned Apple and AstraZeneca, then the estate will have to pay the IRS their due (for the Apple Shares) but not the the AZ shares. After this is done, you have to apply the laws in your own country

The good news for you is that the UK and the USA have a tax treaty that means that you do not have to pay any estate taxes in the US if it is less that 11.5 million, but of course you will have to pay the UK estate taxes. If you were, for example, a tax resident of Chile, it is 60k, after which you have to pay a very high % of estate taxes of shares domiciled in the US.

In that case, it would be better for you to own Irish ETF as they dont have estate taxes for non residents.

Please read the wiki on this, and talk to a lawyer, as I dont know the rules around a joint account.
bsteiner
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Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Inheritance tax: Ireland-domiciled ETF in IBKR

Post by bsteiner »

He should consult with Chilean counsel as to the Chilean estate tax.

The UK has a 40% estate tax (which they call an inheritance tax). The nil rate band (exempt amount) is only GBP 325,000. You may want to discuss with UK counsel whether you can have it come to you in trust rather than outright so as to avoid UK tax on it in your estate.

The UK also has an income tax with a top rate of 45%. You may also want to discuss with both Chilean and UK counsel whether the trust can be set up so as to avoid income tax in Chile and to defer income tax in the UK until the income is distributed to a UK resident. We've done this for U.S. persons with UK beneficiaries.
TedSwippet
Posts: 4040
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Inheritance tax: Ireland-domiciled ETF in IBKR

Post by TedSwippet »

bsteiner wrote: Fri Jan 14, 2022 11:17 am The UK has a 40% estate tax (which they call an inheritance tax). The nil rate band (exempt amount) is only GBP 325,000. You may want to discuss with UK counsel whether you can have it come to you in trust rather than outright so as to avoid UK tax on it in your estate.
Just to be clear here ... for the most part, the UK's estate tax only applies to the estate of deceased UK residents/domiciliaries. In particular, Ireland or Luxembourg domiciled ETFs and other non-UK assets owned by a resident and national of Chile and who dies would not be taxed by the UK (or Ireland or Luxembourg) in any form when passed on to a UK resident. Given the topic author's original questions, it doesn't seem like UK inheritance tax is really on point here.

The only time it might come into play is if the topic author were to pre-decease their father.
bsteiner
Posts: 6449
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Inheritance tax: Ireland-domiciled ETF in IBKR

Post by bsteiner »

TedSwippet wrote: Fri Jan 14, 2022 11:29 am
bsteiner wrote: Fri Jan 14, 2022 11:17 am The UK has a 40% estate tax (which they call an inheritance tax). The nil rate band (exempt amount) is only GBP 325,000. You may want to discuss with UK counsel whether you can have it come to you in trust rather than outright so as to avoid UK tax on it in your estate.
Just to be clear here ... for the most part, the UK's estate tax only applies to the estate of deceased UK residents/domiciliaries. In particular, Ireland or Luxembourg domiciled ETFs and other non-UK assets owned by a resident and national of Chile and who dies would not be taxed by the UK (or Ireland or Luxembourg) in any form when passed on to a UK resident. Given the topic author's original questions, it doesn't seem like UK inheritance tax is really on point here.

The only time it might come into play is if the topic author were to pre-decease their father.
It's to keep it out of the original poster's estate for UK inheritance (estate) tax purposes when he/she dies, since the original poster lives in the UK.
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