It has been almost three years (December 2012) since I first started writing on Index Investing. 150 blog posts and tens of thousands of words later, we are finally here.

In a morbid way, it is kind of fitting that inheritance tax is the final big piece of Index Investing puzzle left for me to tackle. Nah, don’t you worry. I’m gonna keep on writing for here. The possibilities are endless!

The last topic I wrote about was on dividend withholding tax, an area which had caused considerable confusion. By sharing what I knew, I realized that I had also learnt quite a bit during the process of communicating with you guys!

After that, there were a couple of requests for me to touch on inheritance tax (or commonly known as death tax or estate tax, although they aren’t exactly the same thing). The problem is that with my limited knowledge, the only thing I could rely on was Google, and so I did.

Again, challenge accepted! So, it’s time for homework for me. I did some Googling on-and-off, and had written a couple of my emails during the past week or so but they mostly went unanswered. Bummer.

Ah well. Guess we’ll have to do this on a best-effort basis then.

Disclaimer :
Apologies if I make mistakes here. There is a Chinese idiom which translates to bringing jade by laying bricks – 抛砖引玉. It means that what one is offering is somehow lacking, and one is in hopes that others will, seeing it, offer something that is better.

Inheritance Tax

Let’s begin by getting a quick definition of inheritance tax from Wikipedia –

An inheritance or estate tax is a tax paid by a person who inherits money or property or a levy on the estate (money and property) of a person who has died.

Why is this important to know? Depending on which country you are from, you may or may not have the necessary equities products listed on your home country stock exchange to construct your ideal portfolio.

In my case, I built a Bogleheads 3-Fund Portfolio by using FTSE All-World UCITS ETF (VWRD) that is listed on London Stock Exchange as my international stock index fund component. The reason for using an Ireland-domiciled ETF is to reduce the Dividend Withholding Tax.

Thus, we have the following structure in place.

Companies (Global) >> Fund (Ireland) >> Investor (SG)

The possible issue arises if and when we eventually pass away, our investment can be subjected to taxation by the country where the fund is domiciled. In my instance, I’m concerned about Irish tax laws.

Vanguard Prospectus – Gift and Inheritance Tax

Always check the official documentation when in doubt. I dug up important information when checking on dividend withholding tax. Likewise, I did the same here.

From the FTSE All-World UCITS ETF prospectus, in a section titled “Gift and Inheritance Tax”, it goes like this –

Irish capital acquisitions tax (at a rate of 33%) can apply to gifts or inheritances of Irish situate assets or where either the person from whom the gift or inheritance is taken is Irish domiciled, resident or ordinarily resident or the person taking the gift or inheritance is Irish resident or ordinarily resident. The Shares could be treated as Irish situate assets because they have been issued by an Irish company. However, any gift or inheritance of Shares will be exempt from Irish gift or inheritance tax once:

1. the Shares are comprised in the gift or inheritance both at the date of the gift or inheritance and at the “valuation date” (as defined for Irish capital acquisitions tax purposes);

2. the person from whom the gift or inheritance is taken is neither domiciled nor ordinarily resident in Ireland at the date of the disposition; and

3. the person taking the gift or inheritance is neither domiciled nor ordinarily resident in Ireland at the date of the gift or inheritance.

Basically, it says that if both myself and my beneficiary are not Irish residents, then the exemption will apply. Yes!

Irish Taxation Laws

To further clarify and confirm my understanding, a separate source of information comes from The Office of the Revenue Commissioners.

Units in any collective investment undertaking located in the International Financial Services Centre or in the Shannon Customs-Free Airport Zone are exempt from Capital Acquisitions Tax. The exemption also applies to units in Investment Undertakings which qualify for the new collective funds regime introduced by Section 58, Finance Act 2000. In order to qualify for the exemption, the disponer and beneficiary must both be domiciled and resident abroad. However, if the units concerned were purchased prior to 15 February, 2001, it is sufficient that the proper law at the date of the disposition is foreign even if the disponer is domiciled and resident in Ireland. Section 89 Finance Act 2013 provides that an existing exemption on the transfer of units in an investment limited partnership in cases where neither the disponer nor the donee or successor are domiciled or ordinarily resident in the State will continue following the removal of investment limited partnerships from the definition of “investment undertaking” in section 739B(1) of the TCA 1997.

In general, I kept reading information indicating that exemption is given to gifts and inheritances of UCITS (Undertakings for Collective Investments in Transferable Securities) if either the disponer is non-domiciled and not ordinarily resident or the recipient is non-domiciled and not ordinarily resident.

Well, what do I know? FTSE All-World UCITS ETF is indeed the name of the Vanguard fund. By far, these are the most definitive answers I have managed to get on my own.

Getting Stonewalled

Sending emails to Vanguard UK didn’t yield anything mildly useful at all.

Vanguard is relatively new in Europe/ London and our business is predominately focused on institutional investors. We are currently regulated to offer an execution only service which means that we are unable to offer any advice, pro-actively market our funds, or provide additional services such as tax/pension fund wrappers or offer any tax-related advice.

We would suggest that you contact an Independent Financial Advisor or your broker through whom you are investing. Alternatively, a professional tax planner may be the best person to help you to assess your personal tax circumstances in relation to your investment.

Ending Thoughts

It would APPEAR that my concerns on inheritance tax or death tax as a result of investing in Ireland-domiciled ETFs is not an issue after all. And this applies to all global investors, as long as you are not an Irish resident. Looks like Ireland has been set up to be a very attractive destination for funds to be domiciled there.

Once again, please take this with a huge pinch of salt, and understand this only applies to Irish ETFs. I have had to rely on whatever that I could grab off Dr. Google. Also, if you’re investing in a US-domiciled Vanguard ETF, for example, then you’re in for a whole new different set of rules for dividends tax and inheritance tax etc.

In Singapore, there is no Estate Duty payable for deaths on and after 15 Feb 2008. Thus, Singapore-domiciled assets are safe.

Good luck!

P.S. Is there anything that you would like to share with me here? Let’s benefit all of us together!