Should governments scrap inheritance tax to spur business growth?

8th April 2014

MGI World International inheritance tax table shows wide variations

A growing number of countries are scrapping death duties because they are a barrier to wealth creation, according to a report that shows the wild variation in different jurisdictions’ attitudes to inheritance tax.

The UK and Ireland have the highest inheritance tax levels of all major economies, says the UHY Hacker Young study. Britain’s Treasury would typically take 25.8 per cent from the estate of an individual passing on assets worth US$3 million. This compares with just over seven per cent as the global average.

But by setting such a high tariff the UK risks being left behind. Developed countries such as Australia, Portugal, Israel and New Zealand have chosen to ditch inheritance taxes to create simpler tax systems and encourage the creation of wealth, argues the report’s authors.

Ladislav Hornan, managing partner at UHY, says: “Big inheritance tax bills can reduce the incentive to keep creating wealth in order to pass it on to your family. They can also deprive the next generation of capital that traditionally has been key to funding the establishment of new businesses.”

“That is why dynamic developed economies like Australia have scrapped inheritance taxes altogether, and some emerging economies have never imposed them.”

Ireland tops the pile, taxing a $3 million estate at 26 per cent. Japan, Germany, France and the Netherlands also have relatively high inheritance tax rates. Spain’s tax rate is also high, at around 20 per cent, while the country operates the lowest threshold by taxing even a $350,000 estate at ten per cent.

By contrast, Australia, New Zealand and Israel have scrapped their estate tax, while China, Russia and India have never imposed inheritance tax. Portugal scrapped its inheritance tax over a decade ago. Brazil, Italy, Canada and Mexico levy only a very small amount.

The US only imposes a Federal inheritance tax of 40 per cent from $5.3 million, meaning it affects only the very rich. Although 14 out of the 50 states impose a state-level estate tax at lower levels, ranging from 12 per cent to 19 per cent.

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