Rarely does a tax with such a small financial impact cause as much controversy as an inheritance tax. According to an OECD report, in developed countries as a whole, it only generates 0.5% of the total tax revenue of the taxing country. But it has generated too much controversy, especially when someone hinted that it might increase-as is happening now, because the government wants to know how they will pay for the pandemic.
Some critics believe that it is fundamentally unfair to tax people twice, because IHT is charged on assets accumulated during the lifetime of paying income tax. Others say that IHT is by no means unfair, but a key tool to make the world a better place. They believe that the emergence of more and more super-rich elites is being driven by inherited money.
As the OECD points out, misunderstandings abound. The report cited a 2015 public opinion survey in which respondents estimated that more than half of American households paid for IHT. In fact, only 0.1% of people do this. There seems to be something inherent in paying the price of death—as many critics think of an inheritance tax—that obscures judgment.
However, there do exist problems that need to be resolved. According to the report, wealth inequality is increasing in most developed countries, and the share of wealth passed down from generation to generation is generally increasing. This is especially true in the United States. Ironically, the United States is an economy based on the ideal of equal opportunities.
Very wealthy people are more successful than others in reducing IHT. First, they are more likely to use tax havens, where IHT can be minimized. According to the OECD, the richest 0.01% have 50% of tax-avoided wealth. But even without trickery, the super-rich can protect their assets through tax relief, which benefits people with tens of millions of dollars more than those with only millions of dollars.
Many countries grant full or partial exemptions to family business assets, and many countries grant exemptions to agricultural land, especially the United Kingdom. Some people also give preferential treatment to lifetime gifts. According to the report, the effective IHT tax rate for wealth of 10 million pounds and above is 10%, and 19.5% for wealth of 8 million to 9 million pounds. You don’t have to be a left wing to know if something strange happens.
The OECD stated that despite the bureaucracy, the inheritance tax is still worth keeping in order to increase income and promote equality. But it is very right to call for reform. It facilitates taxation of recipients, as has happened in some EU countries, rather than taxation of inheritance as in the United Kingdom and the United States. This is more fair, because the tax collected will reflect the situation of the (living) recipient, not the situation of the (dead) donor. The OECD also proposes to combine inheritance taxes with the taxation of lifetime gifts, thereby imposing a tax on the flow of funds received by recipients over the years, not just a tax on death, which is somewhat arbitrary. As the author admits, the management of lifetime taxation is complicated and difficult to introduce. Their support for reducing IHT exemptions may be happier. They are in favor of a broad tax system, with progressive tax rates and almost no loopholes, so the rich pay more than others.
The OECD recognizes political sensitivity. The reduction of exemptions will inevitably lead to criticism from those who may suffer losses, without the support of those who are not affected. The report suggests that the answer is to combine reforms with other reforms that promote fairness, such as cutting labor taxes. Not to mention, (again) combat evasion and unreasonable avoidance.
For the rich, what is the conclusion? First, ask your consultant to study the report, as there are profound policy differences between countries. Or, better yet, read it yourself. Second, considering the pandemic-driven public debt growth and global government intervention, including the United States, prepare for a higher tax system.
Finally, for those who have a family business, don’t indulge in giving control to children. Businesses and households may have better options, especially if these exemptions take effect.
Stefan Wagstyl is the editor of FT Wealth and FT Money.Follow him Twitter
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