The UK government would typically take 25.8% from the estate of an individual passing on assets worth US$3m to their heirs, well above the global average of 7.67%. This figure takes into account the doubling up of the £325,000 threshold that is typical when the deceased has survived their spouse or civil partner.
If only the £325,000 threshold is available – for example, because the individual has never been married – the proportion of tax taken by the UK would be far higher, with a tax take of 32.9% on an estate of US$3m.
Several developed countries, including Australia, Israel and New Zealand, have chosen to abolish inheritance taxes in order to create simpler tax systems and encourage the creation of wealth, whether through investment or entrepreneurship.
In the UK, the inheritance tax threshold has been frozen at £325,000 since 6 April 2009 and is expected to remain at the level until at least 5 April 2018. This is actually below the average London house price of £409,881, and not far above the national average house price of £250,000.
This means that a tax that was originally designed to apply only to the very wealthy now affects an increasingly large proportion of the population.
By contrast in the USA the 40% federal estate tax applies only to estates of over US$5.34m, and so only affects those with substantial assets. Moreover, the US has raised the threshold for paying the estate tax several times over the last decade, increasing it to its current level from US$1,500,000 for deaths in 2004 – 2005.
Prime Minister David Cameron has recently hinted that the Conservative Party may revive their previous electoral promise to raise the threshold for inheritance tax to £1m per estate.
Ladislav Hornan, Managing Partner at UHY Hacker Young, 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.”
“By contrast in the UK, the Exchequer has become increasingly reliant on the substantial income streams generated by inheritance tax. It has been seen as a lucrative way to extract tax revenues from a relatively ageing population: retirees frequently have lower levels of taxable income, but substantial assets such as mortgage-free homes.
“As more and more UK families are caught in the inheritance tax trap, pressure for major reform is growing.”
Our study found that European countries generally levy the highest inheritance taxes of all, with EU countries in the study taking 15% tax on the inheritance of a property of US$3m, nearly twice as much as the global average of 8%. Many emerging economies have traditionally not imposed inheritance and estate taxes which are seen as discouraging wealth creation. For example, China, India and Russia all have no inheritance taxes.
Mark Giddens, Partner at UHY Hacker Young, comments: “Inheritance tax has become a big earner for the UK Treasury, and inevitably, as rocketing house prices push more and more people into its scope, there is a greater incentive to plan ahead and try and reduce the liability.
“There are specifically targeted investment reliefs from inheritance tax which encourage people to continue to invest productively by making investments in unlisted trading company shares. These can be used as a route to reduce the tax exposure.
“There are also gifting exemptions that allow individuals to pass on wealth while they are still alive, so that inheritance tax can be mitigated entirely if an individual makes gifts to their heirs at least seven years before their death.”
“But it would be simpler and more effective by far for the Treasury to scrap the tax altogether or at least to increase the threshold at which it is paid in a meaningful way, something that David Cameron has been dropping heavy hints about.”