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Expat Briefing Editorial Team
04 April, 2014
You can’t take it with you as the saying goes, but this doesn’t stop the government from taking a large chunk of your estate after your death in inheritance or estate taxes, and new research has shown that the United Kingdom and Ireland levy the highest rates of these taxes among the world’s major economies.
According to chartered accountants UHY Hacker Young, European countries generally levy the highest inheritance taxes of all, with European Union (EU) countries in the study levying a tax of at least 15 percent on the inheritance of a property of USD3m, nearly twice as much as the global average of 8%.
By contrast, many emerging economies have traditionally not imposed inheritance and estate taxes which are seen as discouraging wealth creation. For example, China, India and Russia all have no inheritance taxes. But several developed countries, including Australia, Israel and New Zealand, have chosen to abolish inheritance taxes in order to encourage the creation of wealth.
In the United States meanwhile, a 40 percent federal estate tax applies only to estates of over USD5.34m in 2014.
In Ireland, the Government would typically take 26 percent from the estate of an individual passing on assets worth USD3m – the highest rate in the survey of 23 countries.
The UK government would typically take 25.8% from the estate of an individual passing on assets worth USD3m to their heirs, placing it second in the league table and well above the global average of 7.67%. This figure takes into account the doubling up of the GBP325,000 threshold that is typical when the deceased has survived their spouse or civil partner. If only the GBP325,000 threshold is available – for example, because the individual has never been married – the proportion of tax taken by the UK would be far higher, with a tax take of 32.9% on an estate of USD3m.
Japan comes in third, taking 25.7 percent. France and Spain round out the top five, taking 22.9 percent and 19.9 percent, respectively. At the other end of the spectrum, Romania takes the least amount, at just 1 percent. Canada – unusually for a member of the Group of Seven nations – takes a mere 1.5 percent, or USD16,809 of a USD3m estate.
The percentage taken falls dramatically in the case of assets worth USD350,000. Neither the UK nor Ireland charge tax in this instance. In the UK, the inheritance tax threshold has been frozen at GBP325,000 (USD540,000) since April 6, 2009, and is expected to remain at this level until at least April 2018. In this case, Spain tops the list, taking 10.2 percent, or USD35,572, Nigeria takes 10 percent (USD35,000) and the Netherlands takes 8.5% (USD29,575). The lowest inheritance tax burden for a USD350,000 estate among the countries studied (excluding of course those jurisdictions where IHT doesn’t apply) was found in Japan, which takes just 0.4 percent, or USD1,400. Romania took 0.6%, or USD2,102 and Canada took 1.4%, or USD4,797.
Ladislav Hornan, Managing Partner at UHY, said: "Big inheritance tax bills can reduce the incentive to keep creating wealth in order to pass it on to your family. They can also deprive the next generation of capital that traditionally has been key to funding the establishment of businesses.”
"That is why dynamic developed economies like Australia have scrapped inheritance taxes altogether, and some emerging economies have never imposed them. By contrast, in the UK the Exchequer has become increasingly reliant on the substantial income streams generated by inheritance tax. It has been seen as a lucrative way to extract tax revenues from a relatively ageing population: retirees frequently have lower levels of taxable income, but substantial assets such as mortgage-free homes."
“As more and more UK families are caught in the inheritance tax trap, pressure for major reform is growing,” Hornan observed.
With house prices now rocketing up at similar rates to those seen before the financial crisis, at least in London and the South East of England, inheritance tax is now hitting the estates of those who might be comfortably off, but certainly not wealthy. Indeed, the average London house price of just under GBP410,000 is now well above the inheritance tax threshold, and the national average house price of GBP250,000 is catching it up.
In the UK, the Conservative side of the governing coalition is sympathetic to calls for the scope of inheritance tax to be scaled back. In Budget 2014, Chancellor of the Exchequer announced a new exemption from inheritance tax is to be introduced for members of the emergency services who give their lives during the course of their duties. However, Prime Minister David Cameron said last month that "the ambition is still there" to fulfil a 2007 pledge to raise the inheritance tax threshold to GBP1m.
Speaking at a question-and-answer session with customers of Saga, a company that provides services for the over-50s, the Prime Minister said that the tax "should only really be paid by the rich," but he acknowledged that it was catching families who had put their money into their houses.
Cameron claimed that the policy had yet to make it into the Coalition agreement due to opposition from coalition partner the Liberal Democrats, but said it would be addressed in the Conservative Party's next election manifesto. He said that being able to pass money down through the generations builds a stronger society.
The pledge was made by then-Shadow Chancellor George Osborne at the Conservative Party conference in 2007, at a time when the threshold was GBP300,000. The previous Labour Government introduced a change which now gives married couples and those in civil partnerships a combined threshold of GBP650,000 when the second partner dies.
However, the chances that the Conservatives will get their GBP1m inheritance tax threshold are low while they share power with the Liberal Democrats.
The Conservatives and the Lib Dems have cooperated much more closely than expected when the new government was formed in 2010, especially on economic matters. But the two parties do remain ideologically opposed on certain tax issues, and inheritance and property taxes are two examples. This was highlighted in comments made by Nick Clegg, Lib Dem Leader, at the party’s annual conference last September. Speaking to the media, Clegg explained that the party had prevented the Conservatives from implementing an inheritance tax cut which he said would have “benefited millionaires,” and that the party was committed to "tax fairness."
Conference delegates endorsed a number of measures grouped together as a "Fairer Taxes" policy. These include a Mansion Tax on properties worth over GBP2m; aligning Capital Gains Tax with Income Tax rates; and a GBP1m cap on the lifetime tax allowance on pensions.
Whether or not the Conservatives would have the courage of their convictions and raise the inheritance tax threshold to GBP1m if they won a clear majority in the House of Commons at the 2015 general election remains to be seen. In doing so, they would be depriving the Treasury of some GBP3bn a year in tax revenue which would have to be found from tax increases elsewhere in the system, or from additional cuts in public spending at a time when some of the more serious deficit-cutting reductions in public spending would be just commencing. So the issue is likely to be highly politically sensitive, and it can be assumed that a Labour Government would be on a similar wavelength to the Liberal Democrats.
There are however schemes that allow taxpayers to mitigate their inheritance tax liability, as UHY Hacker Young Partner Mark Giddens explains:
“Inheritance tax has become a big earner for the UK Treasury, and inevitably, as rocketing house prices push more and more people into its scope, there is a greater incentive to plan ahead and try and reduce the liability.”
“There are specifically targeted investment reliefs from inheritance tax which encourage people to continue to invest productively by making investments in unlisted trading company shares. These can be used as a route to reduce the tax exposure”
“There are also gifting exemptions that allow individuals to pass on wealth while they are still alive, so that inheritance tax can be mitigated entirely if an individual makes gifts to their heirs at least seven years before their death.”
As we explained in out Expat Briefing on March 7, another effective means to avoid the inheritance tax net is to place assets into a QNUPS (Qualifying Non-UK Pension Schemes) scheme. This enables expats to avoid both UK inheritance tax and death duties in their country of expatriation.
“But it would be simpler and more effective by far for the Treasury to scrap the tax altogether or at least to increase the threshold at which it is paid in a meaningful way, something that David Cameron has been dropping heavy hints about,” adds Giddens.
We wouldn’t advise anybody hoping to mitigate the impact of inheritance tax on their estate to wait until this happens, however.
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