How does the UK’s Inheritance Tax regime compare to foreign tax systems?
It was inevitable that the impact of the global pandemic on the world’s economy would once again throw a spotlight on the revenue-raising potential of inheritance and gift taxes. The Organisation for Economic Co-operation 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 2 have never taxed wealth transfers. Countries that have abolished estate taxes relatively recently include Austria and Sweden.
- Tax thresholds vary considerably, from $17,000 in Belgium to over $11m in the US (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. The Netherlands and Slovenia are the only two OECD countries to offer favourable estate tax treatment to cohabiting couples.
- Charitable donations are generally exempt in all countries, although payments to charities in other countries can sometimes cause issues.
- 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 (BPR) from UK Inheritance Tax may be available if certain conditions are met;
- 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 10 countries (including in the UK, where Agricultural Property Relief – APR – may be available);
- Most countries tax the beneficiary, with differing thresholds and rates depending on the relationship between the donor and the recipient. The OECD suggests this is the fairest structure. This contrasts with the UK’s approach which is to tax the estate of a deceased person at the flat rate of 40%, subject to various reliefs and allowances.
The reform of Inheritance Tax 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 (OTS) in July 2019 and the All-Party Parliamentary Group (APPG) in January 2020. It remains to be seen whether there will be any far-reaching reforms of the current system 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 although 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 (whether actual or perceived) and how this can be addressed through taxation will no doubt be the subject of continued discussion and heated debate.
This article was featured in The Scotsman.
If you would like any further information please contact Lindsay.BryceMacKay@gillespiemacandrew.co.uk
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