“Old-world” economies charge higher inheritance and estate taxes than “new-world” economies, according to a study by UHY International.
The study examined inheritance and estate tax rates in 23 major economies around the world, measuring the amount of inheritance tax paid on estates of individuals living in those countries. Generally countries do not assess a transfer tax on estates passing from a deceased spouse to the surviving one. The study pointed out that if exemptions or thresholds for inheritance taxes are not adjusted in line with inflation, taxes that were originally designed to apply only to the wealthy will start to affect a larger portion of the population.
In the United Kingdom, the inheritance tax threshold has been frozen at £325,000 (US$ 544,862) and is expected to remain at that level until at least April 5, 2018. This is actually below the average London house price of £409,881 (US$686,058), and not far above the U.K. average house price of £250,000 (US$418,450). The study found that the U.K. and Ireland impose the highest taxes on inheritances of all major economies, with the U.K. government taking 25.8 percent from the estate of an individual passing an estate worth $3 million to their heirs, and Ireland 26 percent.
The U.S., in contrast, provides a $5.34 million exemption for an individual (or $10.68 million for a couple) before any taxes are assessed, and the tax is adjusted for inflation annually. The current estate tax rate is a maximum of 40 percent.
In the U.S., 14 out of 50 states impose a state-level estate tax, ranging from 12 to 16 percent, with tax-free allowances from $675,000 to a high of $5.25 million. A federal estate tax applies from $5,340,000 million. U.K. figures assume doubling of the £325,000 threshold when the deceased has survived a spouse or civil partner. Where this does not apply —for example, because the individual has never been married—the tax would be 32.9 percent on an estate of USD $3 million.
“With the current high threshold for the U.S. federal estate taxes, the great majority of estates will escape such taxation but could be subject to state estate taxes.” said Joseph Falanga, partner and member of the Private Client Services Group at UHY LLP, a U.S. member of UHY International. “State-level taxes are another matter, and while a majority of the states do not impose an estate tax, many retirees consider the existence of such taxes when selecting a retirement location. Certain states, such as Florida, do not impose a state income tax to help increase their attractiveness when consideration of such taxes is part of their analysis. With the anti-tax movement continuing to gain ground in the U.S., we may well see more states increasing their exemption or repealing their estate taxes.”
Several major developed and emerging economies, including Australia, New Zealand, Israel, India and Russia, have repealed inheritance taxes in a bid to encourage more wealth creation and transmission, he added.
In established European economies, by contrast, governments are becoming increasingly reliant on the substantial income streams generated by inheritance tax,” UHY International chairman Ladislav Hornan noted.
“It can be seen as a way of creating tax revenues from aging populations as retirees frequently have lower levels of taxable income, but substantial assets such as mortgage-free homes,” he added. “In many countries where there is less bank financing available, an inheritance is often a crucial source of funding a new business. Also, with low or no estate taxes, the family business can succeed to the next generations. Otherwise, the business may have to be sold to pay the taxes if not planned for. Emerging-markets economies, with their much more youthful populations, have no pressing demographic reason to need an inheritance tax.”