The Worst Countries for Inheritance Taxes

To paraphrase Benjamin Franklin, there is nothing as certain as death and taxes. That's not just an American idiom, it's global.

According to a new study conducted by the UK-based accounting firm network UHY International, “Old” world economies charge higher inheritance and estate taxes than “New” world economies.

The study looked at 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 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 April 5, 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 $3 million 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, partner and member of the Private Client Services Group at UHY LLP, a 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.

“In established European economies, by contrast, Governments are becoming increasingly reliant on the substantial income streams generated by inheritance tax." said Ladislav Hornan, Chairman of UHY International. 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.”