It is well known that inheritance between direct relatives is tax-free in Hungary, meaning that no public charges have to be paid when inheriting from one’s parents. However, the situation becomes more complicated when there is an international element to the inheritance: either the children live abroad or part of the estate is located abroad. In such cases, careful planning is required to ensure that a death does not result in unpleasant tax consequences in addition to its emotional strain.
Nowadays, it is common in Hungarian families for parents to live in Hungary while their children start working in Germany, the Netherlands, France or other foreign countries after completing their studies. It is also increasingly typical for part of the family’s assets to be located outside Hungary: the head of the family buys a holiday home in Spain or Croatia and places part of their investments in an Austrian bank or securities account.
In such cases, the death of a parent raises serious international tax issues. If foreign elements are involved in the inheritance, the tax rules of the countries concerned must also be taken into account. Furthermore, unlike income tax, inheritance duties are not covered by double taxation agreements. This can lead to complications and even multiple tax burdens, regardless of whether inheritance duties would otherwise be payable in Hungary.
If the children live abroad
The regulations of developed countries differ in how they tax inheritance. Some countries tax inheritance if the heir lives in that country or has tax residency there. If the child of a Hungarian parent moves to and lives in such a country, the inheritance from the parent may be taxed there.
Germany is a typical example. If, at the time of the Hungarian parent's death, the child is a tax resident in Germany, the inheritance will be taxable in Germany. Moreover, the tax liability extends to the entire estate inherited by the child, regardless of the country in which it is located. Although German law provides for a tax-free threshold (EUR 400,000), German legislation imposes a progressive duty of between 7% and 30% on assets above this threshold, which can represent a significant overall tax burden.
The situation is similar in France. Here, a child may become liable for tax on assets inherited from a Hungarian parent if they are resident in France on the date of death and have been a French resident for at least six of the previous ten years. As in the German example, the tax liability in this case covers the entire inherited property, regardless of its location.
Tax liability may also arise in the United Kingdom if the child has lived in the country for more than 10 of the past 20 years.
However, there is no need to fear foreign tax liability if your child settles in the Netherlands or Denmark. In these countries, tax liability is not based on the heir’s place of residence or domicile. The situation is even more favourable in Sweden, where inheritance tax was abolished more than 20 years ago.
But what if part of our assets are located abroad?
Hungarian inheritance tax rules only apply to movable property located abroad if the country where the asset is located does not levy inheritance tax, and they do not apply to foreign real estate at all. Therefore, in situations where the deceased has assets outside Hungary, the rules of the country concerned will ultimately determine whether a tax liability arises.
Most countries tax the acquisition of local real estate through inheritance. These include Spain, Portugal, Italy, Switzerland and Austria. However, some of these countries (e.g. Portugal) exempt inheritance between direct descendants from taxation. Taxation between direct relatives is also favourable in Switzerland, where, depending on the canton, there is either no tax or only a minimal tax rate on inheritance between children and parents.
It is less common for a country to tax the inheritance of movable property located within its territory. Such property typically includes cash or securities held in bank accounts in that country, or shares in companies located there. Spain, for example, taxes the inheritance of Spanish bank deposits or shares in Spanish companies, but a similar tax may also arise in Italy if the deceased owned shares in an Italian company at the time of death and the value of the shareholding exceeds EUR 1 million.
The situation becomes particularly complicated when both the heir’s place of residence and the location of the inherited assets trigger taxation in different countries. For example, if the child of a Hungarian head of household lives in Germany but the inheritance also includes a bank deposit in Spain, it would be wrong to assume that the inheritance is tax-free: in theory, both Spain and Germany could tax it. In such cases, it depends on any agreement between the two countries whether taxation can be avoided in either jurisdiction.
How should we plan?
Preparing for inheritance is not only a moral and emotional issue, but also a serious financial and tax matter that is worth planning for. First and foremost, it is important to assess what the tax situation would be in the event of the parents’ death, given the family’s current circumstances (such as the children’s place of residence and the distribution of assets across countries).
If the analysis indicates that taxation would arise upon the parents’ death, the most practical way to avoid or mitigate this may be to set up a trust and transfer the assets into it. In this case, there is no immediate inheritance upon the death of the parent, as the heirs only become beneficiaries of the trust. The distribution of assets from the trust can therefore be arranged flexibly in terms of timing.
For example, prior to distributing assets to the children, shares in an Italian company could be sold or funds held in a foreign bank account could be transferred to a Hungarian bank account. With the involvement of the Hungarian version of a trust (bizalmi vagyonkezelés), it is also possible to ensure that the heirs receive the assets only when it is tax-efficient for them to do so (for example, after they move back to Hungary for at least one year, allowing them to receive the inheritance tax-free as Hungarian residents).