Inheritance tax: a contentious levy ripe for reform?

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What about inheritance tax, levied by the government on your assets after your death? For some, it is an unfair double burden on assets accumulated over a lifetime of paying income taxes. For others, it is a strength to work well to reduce wealth inequality fueled by family money. Either way, inheritance tax is controversial, especially since it’s a minnow in tax terms.

A 2021 OECD report indicates that it represents only 0.5% of total tax revenue in the countries that levy it. But that could change as governments are saddled with public debt following pandemic inheritance tax hikes to help replenish their coffers. Meanwhile, current systems are struggling.

The OECD says that wealth inequality is increasing in most developed countries. And an increasing proportion of individual wealth, up to 60% in the UK and US, is inherited. There are established ways for wealthy families to circumvent inheritance tax. Low tax havens are an obvious destination for their money. According to the OECD, the richest 0.01% of people own half the wealth of tax havens. They can also leverage generous tax breaks on family businesses, for example, farmland, and gifts made during the donor’s lifetime.

The OECD says inheritance taxes are valuable in raising incomes and tackling wealth inequality. But it calls for major reforms to make taxation fairer, more efficient and broader. Rather than levy inheritance tax, he wants to see the tax levied on beneficiaries, as is already done in some EU states. In this way, the tax reflects the financial situation of those who receive the wealth.

He suggests that lifetime donations should also be taxed, to reflect the passing down of family money over the years, although this can be both unpopular and difficult to administer. It also promotes closing loopholes and making taxes progressive so that the wealthiest really pay the most. For the rich, it is worth studying the report and understanding the profound political differences between the countries. But beware, cash-strapped post-pandemic governments are likely to have inheritance taxes in their sights.

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