Inheritance tax: How does it affect me?

3 min. reading
Financial Education, Wealth Planning / 16 November, 2018
Inheritance tax: How does it affect me?

Ricardo Ramírez Wealth Planning

Revenues from inheritance and gift taxes have reduced over the years; from an OECD average of 1.1% of total tax revenues in 1965 down to the present 0.4%. A government's main objective is to cover the basic needs of its citizens. The most important basic needs include ensuring that people have a job, a decent home, food and healthcare, with the ultimate aim of increasing the country's overall wealth and development. To achieve this goal, countries need to have sufficient financial resources available. These resources can be obtained in many different ways, with tax revenues being one of the most important. Increasing the tax take seems simple, since all that is required is to raise the amount charged for existing taxes or create new ones. However, these measures are perceived as unpopular, as to increase revenue significantly, tax rises must have an impact on the majority of the population.
Among the taxes which bring in the biggest tax haul are social security taxes, VAT and duties on petrol and alcoholic drinks.
Inheritance tax is one more tool that governments can use to increase the tax take, and in this case it has a two functions: to raise revenue and redistribute wealth.
  • As a means of raising revenue, its ability to contribute to government revenues is debatable, as it accounts for barely 0.4% of total taxation in OECD countries.
  • As a means of wealth redistribution, it is also doubtful since most systems have more or less sophisticated means of avoiding taxation: the higher a person's wealth, the greater their incentive to look for legal ways to reduce their tax bill. In Japan, it is estimated that only around 8% of inheritances are subject to it and in the UK it is less than 5%2.
Many countries have opted to abolish this tax in the last few years. 17 of the 36 OECD countries do not have an inheritance tax. 13 countries have abolished it since 2000. Sweden and Norway, which have two of the most developed welfare states in the western world, removed it in 2005 and 2014 respectively. However, in clear contradiction of this reality, the OECD has recently recommended that Mexico and India introduce an inheritance tax, despite the difficulty that this involves in countries where bureaucratic procedures are still less than perfect, not to mention the scant benefit it will bring to their tax receipts, according to their own analysis.
In Switzerland, the tax is not imposed on financial assets held in the country, when neither the deceased persons nor their heirs are Swiss residents.
The way the social function of inheritance tax is understood may vary not only from one country to another, but also within the same country. In Spain, for example, EU residents may obtain a more favourable inheritance tax treatment than non-EU residents and, furthermore, this treatment, also varies according to which region of Spain they live in. For example, in Madrid it is reduced by 99% for children inheriting from their parents, so that in the worst case they would pay 0.34%, compared with the other Spanish Regions where the maximum is 34%. In most countries heirs are taxed on all the assets they inherit, regardless of the country where they are located. This may result in double taxation, if a tax is also levied in the other country where the assets are held and, in such cases, it is particularly advisable to count on expert professional advice in each of the countries involved. For example, if a person is living in one country at the time they inherit from their parents, and their parents had assets in the US, that person could be subject to inheritance tax in their own country and in the US. When you have financial interests in several countries, it is useful to receive advice prior to making the investments, whether they be in property, financial assets or in companies or businesses. It is also very important to clearly understand the taxes that exist in the country of destination in case one of your children is going to live temporarily or permanently in another country, since an unexpected event could trigger a tax liability, which with the correct planning could have been avoided or reduced.