Inheritance tax

The future of inheritance tax

With Covid-19 forcing governments worldwide to look at tax increases, Dennis Petri asks whether inheritance tax is in line to rise.

Dennis Petri Chairman, UHY International

The bill for Covid-19 tax reliefs, furlough schemes and economic stimulus packages is shortly coming due for governments around the world. Every finance minister is being forced to look at how they will address enormous deficits that could not have been imagined 12 months ago. Increasing rates or reducing reliefs on inheritance tax will certainly be under consideration in many economies. What does the current global picture of inheritance tax rates look like, and should inheritance tax be a prime target for tax increases in 2021 and beyond? before the pandemic. The study compared the “inheritance tax” paid on $3 million of cash. The calculations are based on the deceased having two heirs receiving an equal share – both adult, non-dependent children. Both the deceased and heir are tax residents in the country.

The study found that, overall, those inheriting wealth in G7 and EU economies are taxed on average at a rate 10 times higher than those inheriting wealth in emerging economies.

Individuals in G7 countries pay an average of 16.8% ($503,321) and those in EU countries pay an average of 10.9% ($325,775) in inheritance tax when passing on $3 million in cash to their beneficiaries. In comparison, individuals in emerging economies pay an average of just 0.9% ($28,429) when passing on $3 million in cash.

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The disparity is also reflected in lower value bands. EU individuals pay on average 3.8% ($13,320) in inheritance tax on $350,000 in cash versus an average of 0.7% ($2,326) in emerging economies. Similarly, average inheritance tax rates in the EU on $750,000 are 5.0% ($37,358), compared to 0.7% ($5,604) in emerging economies.

The arguments surrounding inheritance tax The arguments against such high rates of inheritance tax are clear. They can discourage entrepreneurs from building wealth as they face high income tax throughout their career, followed by high inheritance charges for their loved ones. Why keep working hard if so much of the money you make is taxed?

Some argue that taxes on inheritance burden families at a time when they are dealing with a bereavement, and contribute to family assets – homes and businesses among them – being broken up and sold to cover the tax bills.

However, the strength of these arguments may weaken in the face of the sheer size of the deficits that need to be addressed. Tax revenues will need to be found somewhere and difficult choices will have to be made. Will governments choose to increase taxes on businesses’ profits when they are already laying off staff? Should they institute a wealth tax? Should they tax capital gains at the same rate as income? Increasing inheritance tax may be easier politically than some of the alternatives.

Economic growth It makes for a stark contrast to compare the economic growth rates, according to the International Monetary Fund, (pre-pandemic, at least) of the high tax and low tax economies in our study when it comes to inheritance tax. Among the countries in our study with the highest rates of inheritance tax on a cash inheritance of $3 million are some of the major economies of Europe – France, Germany, the Netherlands and the UK. Each saw annual GDP growth of 1.7% or less in 2019. Japan, the highest inheritance tax economy in our study, grew its GDP by just 0.7% that year.

By comparison, many of the countries in our study with zero rates of inheritance tax on a $3 million estate – China (6.1% GDP growth), India (4.2%) and Malaysia (4.3%) – were much faster-growing economically in 2019.

While it’s clear that high rates of inheritance tax do not by themselves cause slow economic growth, it is not hard to make the argument that the ability to pass on assets to the next generation without high levels of tax incentivises entrepreneurs to grow businesses, increases employment and creates wealth.

When considering inheritance tax increases, governments around the world must also assess the risk of pushing high net worth individuals to leave for countries that they might see as more welcoming from a tax perspective. Looking at our study, it is not only emerging economies that present a threat in that regard. Australia, New Zealand, Portugal and many states in the US can all offer the quality of life that wealthy individuals seek, while not levying any inheritance tax at all on a $3 million estate.

Ultimately, the choice of whether to increase rates of inheritance tax to pay for the costs of the pandemic is a political one. Governments around the world should consider the full costs before they make their decision. What they gain in tax receipts in the short term may be outweighed by a heavy inheritance tax burden’s contribution to slower economic growth in the longer term. ●

Author bio

Dennis Petri is chairman of UHY International, a partner in UHY LLP and a managing director of UHY Advisors MI, Inc. He also serves as international liaison partner.