A new study, recently conducted by UHY International, found that “Old“ world economies charge higher inheritance & estate taxes than “New” world economies.
The study looked at inheritance & 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 access a transfer tax on estates passing from a deceased spouse to the surviving one. The level at which inheritance tax thresholds are set is a crucial issue for middle class families; therefore, if exemptions or thresholds are not adjusted in line with inflation it can mean that taxes that were originally designed to apply only to the wealthy will start to affect a larger portion of the population.
By contrast, in the UK, the inheritance tax threshold has been frozen at £325,000 (US$ 544,862) 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 (US$686,058), and not far above the UK average house price of £250,000 (US$418,450).
The US, on the other hand, provides a $5,340,000 exemption before any taxes are assessed and is adjusted for inflation annually. The study found that the UK and Ireland impose the highest taxes on inheritances of all major economies, with the UK Government taking 25.8% from the estate of an individual passing an estate worth $3m to their heirs, and Ireland 26%.*
“With the current high threshold for the US federal estate taxes, the great majority of estates will escape such taxation but could be subject to state estate taxes.” said Joseph Falanga, UHY LLP Partner and member of the Private Client Services Group at UHY LLP, the US 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 does 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 US, 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 Several major developed and emerging economies including: Australia, New Zealand, Israel, India and Russia have repealed inheritance taxes in a bid to encourage more wealth creation and transmission.” said Falanga.
Ladislav Hornan, Chairman of UHY International adds “In established European economies, by contrast, Governments are becoming increasingly reliant on the substantial income streams generated by inheritance tax. 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.”
“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.”
*in the US, 14 out of 50 states impose a state-level estate tax, ranging from 12% to 16%, with tax free allowances from $675,000 to a high of $5.25 Million. A federal estate tax applies from $5,340,000 million. UK figures assume doubling up of the £325,000 threshold when the deceased has survived their spouse or civil partner. Where this does not apply e.g. because the individual has never been married, the tax take would be 32.9% on an estate of US$3m.
For a property of USD$3,000,000
Amount of tax and charges paid
% of property price