Inheritance tax can be used to tax planning. This article focuses on the tax aspects of the home or property to be inherited.
Finland's inheritance tax is one of the highest in Europe
Finland pays high taxes. In international comparison, for example, our national income taxation is harsh in high income brackets, while on the other hand, taxation of low-income earners is close to the European average.
Portugal, Estonia, Sweden, Russia, Austria and Norway have abolished inheritance tax completely. Inheritance tax is applied in Germany, France, the Netherlands and Denmark, but in all these countries it is only applied to substantial inheritances and the tax rate is lower than in Finland. Inheritance tax is the subject of constant criticism, in particular because it reduces the ability of family businesses to be passed on to the next generation. In addition, inheritance tax is paid on assets on which the deceased has already paid all taxes related to the acquisition of income and assets once during his or her lifetime.
In Finland, there are two tax brackets, with a lower rate of Class I tax for spouses and heirs and a higher rate of Class II tax for other heirs and legatees. In both tax brackets, inheritance is tax-free up to €20,000, after which the tax rate is progressively increased. You can calculate the exact amount of your inheritance tax using the inheritance tax calculator on our website.
Inheritance tax in Finland is particularly harsh for large inheritances. In such situations, tax planning needs to be considered both during the lifetime of the deceased and after death.
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Collecting on housing and real estate - avoid excessive capital gains tax!
Most of the estates” assets are shares in housing companies and real estate, most commonly cottages and detached houses. The key issue for tax purposes is whether the heirs intend to sell or keep the inherited property. If the property is kept, inheritance tax is payable, but if the property is to be sold, capital gains tax, often referred to as ”capital gains tax', is also payable.
A dwelling is sold at a ”profit” for the tax authorities if the sale price is higher than the value of the dwelling at the time of the deceased's death. If a property is entered in the deceased's will for €200,000 and sold for €240,000, the gain is €40,000. The capital gain is taxed at €30,000 up to €30 % and €34,000 above €30,000. The €40,000 gain in the example case will therefore be subject to a capital gains tax of €12,400.
Sometimes, the value of a home is understated in a will, due to negligence or in the hope of lower inheritance taxes. It is possible that the tax authorities will not pay attention to the declared value of the home, but this situation will be retaliated against when the home is sold. Since the home in the previous example was actually worth €240,000, if correctly declared, it would have been subject to inheritance tax of €28,100 for the sole heir and no transfer tax would have been payable at all. As a result of the undervaluation of the dwelling, the heir will have to pay inheritance tax of €21,700 and transfer tax of €12,400 on the sale of the dwelling, making a total of €34,100. The tax bill is €6,000 higher, even though the original intention was to save on taxes.
If the home had been inherited by three heirs, the tax consequences of the undervaluation would be even more severe: correctly stated, the heirs would have paid inheritance tax of €6,100 each, but after transfer taxes, the tax rises to €8,500 per heir and the total inheritance tax is €7,200 more.
Further explanation and request for adjustment of inheritance tax to the tax authorities
However, the above example can be influenced by a further inquiry to the tax authorities and, if necessary, a request for rectification. If a dwelling was declared in the deed of inheritance to be worth €200,000 and it is sold for €240,000, the tax authorities can be informed of the sale afterwards by means of a supplementary declaration. A copy of the deed of sale is attached to the supplementary declaration and the tax authorities will update the value of the dwelling in the deed of inheritance. At the same time, for example, expenses incurred for the renovation and refurbishment of the dwelling, which reduce the transfer tax, can be reported. The additional declaration can be made as long as the inheritance tax has not yet been submitted, which in practice is about a year.
Once the inheritance tax has already been submitted, the situation in the example can be rectified by a request for adjustment. The preparation of a request for rectification is more complex than a further investigation and it is therefore necessary to ask a lawyer specialising in estate taxation to at least assess the situation. A request for adjustment can be submitted for a period of five years from the date of submission of the inheritance tax return. It is worth bearing this in mind if, for example, you decide to sell a dwelling that you inherited a few years ago and which is held by your heirs. In the example case, the value of the dwelling was €240,000. In the case of a particularly valuable dwelling, for example an apartment worth €800,000 in the centre of Helsinki, ignoring tax considerations in inheritance tax and the sale of the dwelling could, at worst, result in tax consequences several tens of thousands of euros higher than if the tax had been taken into account properly and in good time.
Careless tax planning can also lead to the loss of the benefits of the minor and spousal deduction. However, with a minimum inheritance tax threshold of €20,000, a minor beneficiary can receive an inheritance tax-free up to €60,000 and a widow up to €110,000. These deductions do not apply to capital gains tax.
Use of the cost assumption and inheritance
If the dwelling is sold more than ten years after it was inherited, the presumption of acquisition cost may be applied when calculating the capital gain. In this case, the acquisition cost - above which the sale price is a gain - is considered to be 40 % of the sale price. The capital gain on the sale of a €240,000 home would then be €144,000 and the capital gains tax would be €47,760.
If the deceased is selling a home that he inherited several years ago, which for one reason or another has been valued very low in the deceased's inheritance book, and the deadline for filing an appeal has already passed, it may be worth waiting until the ten-year period of ownership has passed. In the case of the example, this would make more sense from a tax point of view if the €240,000 home is valued at, say, €80,000 in the deceased's will. Without the application of the cost assumption, the transfer tax would be EUR 53,200, or EUR 5,440 more. If the home was inherited nine years ago, it would be worth waiting another year for the sale to achieve the tax advantage.
Inheritance tax checklist for inherited dwellings and real estate
When the deceased leaves a dwelling or property to his/her heirs, at least the following should be properly taken into account for tax purposes:
- Is the home or property to be sold or kept?
- Is the home or property to be renovated or refurbished before a possible sale?
- Even if the intention is to keep the home or property, could a sale still take place within five years of the date of inheritance?
- Will the dwelling or property be sold in more than ten years?
- Is the widow or widower to remain living in a dwelling or property owned in whole or in part by their spouse?
- Do you expect a significant increase in the value of your home or property in the coming years?
These are questions to think about before you submit your will. The earlier you make a considered plan for the use of your home or property, the fewer tax issues you will have to worry about in the future.
Article written by a legal scholar Samvel Margarjan From Amos Law Office Ltd. You can always call him free of charge on 010 299 5090. You can check our price list Here.
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