A Fabian Society report has presented findings from a series of focus groups across the country, which they say demonstrates that inheritance tax (IHT) is regarded as unfair – across the political spectrum. They recommend that it should be scrapped entirely and in its place, gifts and other transfers should be taxed instead as income, at the recipient’s marginal rate. This would broadly shift the burden from the estate onto the beneficiary, meaning that the gift would be added to their other income for the year, and taxed accordingly.
This got me thinking about the inheritance regimes in some other countries and how ours compares:
In the UK, unless the Will says otherwise, any IHT that is due is paid by the estate. IHT is calculated broadly on the value of the assets in the estate, less any debts that are due at death. Broadly, any part of the estate that is passing to a surviving spouse or civil partner (or to charities or some other exempt bodies), will be exempt, but otherwise, subject to the nil rate band of £325,000 (possibly double this on the death of a surviving spouse who has inherited from the first spouse to die), the balance of the estate is subject to a flat rate of IHT of 40%. There are some other exemptions, but broadly, the tax band is the same whether the estate passes to your infant child, a third cousin once removed, or a friend.
In the US, the system is similar, in that any tax is paid from the estate, and they also have a full spouse exemption (provided both spouses are domiciled in the US). Their nil rate band equivalent is much more generous than ours, at currently just over US$5m. Our basic nil rate band is £325,000.
In many western European countries, the IHT equivalent operates differently and tends to be a liability that is due from the beneficiary rather than the estate. Mostly, they do not have the concept of executors to deal with the administration of the estate and so the gift passes direct to the beneficiaries, but potentially subject to tax in their hands.
In France, Spain and Germany, there is no total spouse exemption, although in all cases, there is a partial exemption. However, unlike England, there are partial exemptions for other family members, so tax will be levied at varying rates and after different deductions depending on the relationship of the beneficiary to the deceased, and in some cases, it may also depend on the age of the beneficiary.
In France – gift and inheritance taxes are calculated on a beneficiary’s net entitlement. Although rates vary according to the family relationship between the deceased and the beneficiary, they do not depend on the beneficiary’s personal wealth.
In Spain – in general terms, the tax due on inheritance is based on the amount received and the beneficiary’s previous wealth and relationship to the deceased.
In Germany – each beneficiary is liable for IHT or gift tax on the value of their share of the estate and their personal wealth is not taken into account. Generally, there are personal allowances for relatives.
Are we out of step with our Continental neighbours in taxing the estate and not the beneficiary?
Is it time to rethink IHT? Is it ‘too toxic to save’ as the Fabian society think or should it be abolished altogether, with no replacement, on the basis that it is taxing money that has already been taxed in the hands of the deceased? It is a question that continues to divide opinion.
This is just a brief and broad outline of the tax systems and is not intended to reflect a complete picture.