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Taxation of inherited property

Death is an inevitable condition of human nature. Sooner or later everyone faces death of loved ones, and, as a rule, the issue of inheritance of property belonging to the deceased person always arises. Regardless of the property of the estate, the procedure of acceptance of the inheritance is the same in either case.

The time of opening of the inheritance is the day of death of the testator. Under the Civil Code the deadline for coming into inheritance makes up six months. During this time, the heirs shall go to a notary's office, submit the death certificate, the documents proving the kinship and an excerpt from the last place of residence (domicile address) of the deceased.

The estate includes all the property of the deceased, except for moral rights and other intangible benefits such as:

  • the right of authorship, according to which the heir can not call him/herself author of the work;
  • the right to a name, that is, the heir does not solve issues as to under which name or pseudonym the work will be published;
  • the right to inviolability of the work according to which the work must be used in the form created by the author.

Property rights, such as exclusive rights to works can be transferred by inheritance. Exclusive right to work is the right of its holder to use such work at his/her discretion in any manner that does not conflict with the law. Use of the work regardless of whether the relevant actions are committed for making profit or otherwise is considered:

  • reproduction of a work;
  • distribution of a work by sale or other disposal of its original or copies;
  • public display of the work;
  • import of the original or copies of the work for distribution purposes;
  • rental of the original or copy of the work
  • etc.

According to Tax Legislation, individuals who received any income shall pay a 13% tax thereon.

The income obtained by inheritance, shall be exempt from taxation , it does not matter how the inheritance occurs - by will or by law. This provision applies to inherited property, on which the certificates of inheritance are issued since 1 January 2006. The tax on property transferred by inheritance or gift was cancelled on 1 January 2006 by the Federal Law of 1 July 2005 N 78-FZ “On annulment of certain legal acts (provisions of legal acts) of the Russian federation and amendments to certain legal acts of the Russian federation in connection with the cancellation of the tax on property transferred by inheritance or gift”. Thus, if the testator died before 1 January 2006, but the heirs for some reason did not come into an inheritance within six months and restored by court the deadline of coming into inheritance, the tax on the property obtained is levied.

However, the taxpayer is exempt from personal income tax only in case of inheritance of property or property right. If the heir decides to dispose of the inheritance or use it, for example to rent an apartment, obtained by inheritance, receive income under license agreements granting rights to use the work, receive royalties or sell inherited property, the income received is subject to taxation.

In case of sale of real estate received by inheritance, it should be remembered that such income is no longer an inheritance property, and upon its receipt the individual is obliged to pay the PIT.

It should be remembered that if the real estate was owned by the taxpayer three or more years, the income received by individuals who are tax residents of the Russian Federation, for the relevant tax period from the sale of houses, apartments, rooms, including privatized dwellings, villas, garden houses or plots and interests therein are exempted from taxation regardless of the grounds of their acquisition.

Upon sale of inherited property, which was owned less than three years, the heir may use the tax deduction in the amount of 1,000,000 rubles. The confirmation of the testator’s costs for the purchase of the property, which passed by inheritance, does not affect the amount of the tax base.

The situation is different with the sale of securities received by inheritance.

If the taxpayer purchased (including he/she obtained free of charge or for a partial payment, as well as by means of gift or inheritance) securities, upon taxation of sales (redemption) of securities, documented expenses for purchase (receipt) of such securities will be amounts on which the tax on purchase (receipt) of such securities was calculated and paid and the amount of tax paid by the taxpayer.

In the event that the taxpayer receives securities by way of gift or inheritance the tax is not levied, upon taxation of income from sale (redemption) of securities received by the taxpayer by way of gift or inheritance, documented expenses of the donor (testator) for the purchase of these securities are also taken into account.

The Tax Code provides for the exempt from personal income tax if such income in cash and in kind is obtained from individuals by inheritance, except for the compensation paid to the heirs (successors) of authors of works of science, literature, art, as well as discoveries, inventions and industrial designs.

Based on the foregoing, in the event of sale of securities acquired by inheritance, the tax base for the personal income tax is defined as the difference between the amount of income derived from sale of securities and documented expenses of the testator for purchase of these securities.

The tax liability ceases upon the death of the taxpayer or recognition of his/her death in accordance with civil legislation of the Russian Federation.

In this case, the property tax debt is not transferred to the heirs.

It is important to remember that the accepted inheritance is recognized as belonging to the heir from the date of opening of the inheritance regardless of the time of its actual adoption, and regardless of the date of state registration of the heir’s right to the estate when such right is subject to state registration.

Thus, upon acceptance of the inheritance, which includes real estate or vehicles, the individual becomes taxpayer of the property tax from the date of death of the testator.

In this case, the payers of land tax are organizations and individuals that are owners of plots, right of ownership, right of permanent (perpetual) use or right of lifetime inheritable possession, being treated as subject to taxation in accordance with article 389 of the Code.

According to the civil law the inheritance relations are determined by the law of the country where the testator had his/her last place of residence.

Inheritance of real estate is determined by the law of the country where the property is located, and the inheritance of real estate, which was included in the state register of the Russian Federation – under the Russian law.

Upon receipt by a Russian citizen of inheritance, which includes real estate, the inheritance law of the country in which the property is located should be taken into account.

In most countries of the world inheritance is subject to income tax. The tax rate often varies depending on the amount of estimation of the estate. So, for example, in England the Inheritance Tax (IHT) is paid by heirs of a deceased person that came into an inheritance. The property valued at an amount less than £ 325,000 in 2013-2014 is not subject to inheritance tax. All that is more than £ 325,000 will be subject to 40% tax. For people who are lawfully married until the death of one of the spouses, this threshold is increased to £ 650,000.

In France the inheritance taxes are paid by heirs as well. The amount of tax depends on the degree of kinship between the heir and the testator. In a joint property spouses have equal rights to it. After the death of one spouse all ownership rights are transferred to the other spouse without paying taxes, but if the marriage was not registered, people living together are treated as outsiders and pay taxes regardless of the period of cohabitation and joint housekeeping. And only after the death of the second spouse the property goes to children born in this marriage.

Children are required to pay inheritance tax.

The inheritance tax rate in France makes up 20%, in the case of a straight line - up to 60% for the heirs who have more distant kinship or heirs who are not related at all.