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Where do you stand on inheritance tax, levied by the government against your wealth after you die? For some it’s an unfair double charge on assets built up over a lifetime of paying income tax. For others it’s a force for good working to reduce wealth inequality fueled by family money. Either way, inheritance tax is controversial, especially considering it’s a minnow in tax terms.
A 2021 OECD report says it accounts for just 0.5 per cent of total tax revenues across those countries that levy it. But that may be set to change as governments are laden with public debt following the pandemic eye inheritance tax increases to help rebuild their coffers. Meanwhile, current systems are struggling.
The OECD says wealth inequality is rising in most developed countries. And an increasing proportion of individual wealth, as much as 60 per cent in the UK and the US, is inherited. There are established ways for well-off families to sidestep inheritance tax. Low-tax havens are an obvious destination for their money. The richest 0.01 per cent of people own half of tax haven wealth, according to the OECD. They can also exploit generous tax breaks on family businesses, for example, agricultural land, and gifts made during the donor’s lifetime.
The OECD says inheritance taxes are valuable for raising revenue and fighting wealth inequality. But it calls for significant reforms to make the tax fairer, more effective, and broader based. Rather than levying the tax on the estate, it wants to see the tax levied on recipients, as already happens in some EU states. That way the tax reflects the financial situation of those receiving the wealth.
It suggests lifetime gifts should also be taxed, to reflect the passing on of family money through the years, though this could be both unpopular and difficult to administer. It also favours closing loopholes and making the tax progressive so that the wealthiest really do pay the most. For the wealthy, it’s worth studying the report and understanding the deep policy differences between countries. But be warned, cash-strapped post-pandemic governments are likely to have inheritance taxes in their sights.