Lindsay Bryce Mackay: Pandemic prompts re-examination of inheritance and gift taxes
It was inevitable that the impact of the pandemic on the world’s economy would once again throw a spotlight on the revenue-raising potential of inheritance and gift taxes, writes Lindsay Bryce Mackay.
The Organisation for Economic Cooperation and Development (OECD) has recently published a report exploring the ways in which these taxes can be used to support economic recovery. It also includes an interesting review of the different approaches taken by the OECD’S 38 member countries.
The structure of estate taxes varies considerably from country to country. Key points from the report are as follows:
- Of the 38 OECD members, 24 impose taxes on gifts and inheritances. Ten countries have abolished inheritance tax since the 1970s, and two have never taxed wealth transfers;
- Tax thresholds vary considerably, from $US 17,000 in Belgium to over $US 11 million in the United States (the tax-free amount in the UK is £325,000);
- Most countries (including the UK) have preferential tax treatment for gifts and inheritances between spouses and civil partners;
- Charitable donations are generally exempt in all countries;
- The most commonly exempt assets within the OECD countries include: the main residence. (In the UK, a house is not exempt, but an additional tax-free amount – the Residence Nil Rate Band or RNRB – is available in certain circumstances);
- Business assets
- (Business Property Relief from UK Inheritance Tax maybe available if certain conditions are met);
- Pensions (most pensions are outwith the scope of UK Inheritance Tax); and Life assurance policies. Broadly speaking, these are taxed in the UK unless they have been written in trust.
- Agricultural land only receives preferential estate tax treatment in ten countries (including the UK)
Most countries tax the beneficiary. This contrasts with the UK’S approach which is to tax the estate of a deceased person at the flat rate of 40 per cent, subject to various reliefs and allowances. The reform of IHT has been on the political agenda for some time. The current system is often seen as unduly complicated and unfair, and there have been various proposals for reform put forward by organisations including the Office of Tax Simplification in July 2019 and the All-party Parliamentary Group for Inheritance and Intergenerational Fairness in January 2020.
It remains to be seen whether there will be any far-reaching reforms, although hopefully there will be some immediate reform around the tax returns that have to be lodged to limit the number of returns which have to be filed even when there is no IHT payable. This unnecessarily delays the administration of many estates.
As the world strives for economic recovery, the question of wealth inequality and how this can be addressed through taxation will no doubt be the subject of continued heated debate.
Lindsay Bryce Mackay is an associate at Gillespie Macandrew