Taxes On Wealth – The Global Landscape
With new taxes on wealth being considered in jurisdictions such as Singapore, Canada and New Zealand, recent proposals to reform US estate tax and possible reform of UK inheritance tax on the horizon, we consider the implications of these proposals for wealth management and structuring in these regions and beyond.
Although political appetite for inheritance taxes has been on the wane in recent decades (nine OECD countries have abolished inheritance or estate taxes, since the 1970s[i]), massive black holes at the centre of governmental finances coupled with the economic shocks of the pandemic raise the possibility of new taxes on wealth being introduced and existing ones reformed. That is despite the fact that only 0.5 per cent of total tax revenues in OECD countries come from these taxes.[ii]
For example, Belgium has already introduced a new wealth tax last year, at a rate of 0.15 per cent on securities accounts that exceed EUR1 million in average value.[iii]
New Zealand, which currently has no form of estate duty, inheritance tax (IHT) or capital transfer tax is marked as a jurisdiction to watch. Its government has recently earmarked NZ$5million for the Inland Revenue to review the income and wealth of HNWIs over the next two years, and the tax collected from such individuals in advance of the next election. This has sparked rumours of a new IHT being introduced, possibly aimed at the top 1 per cent in wealth terms.[iv]
Singapore is another. The chief of Singapore's central bank, Ravi Menon, recently said there may be a need for a property gains tax or an inheritance tax to address wealth inequality.[v] However, he also cautioned that taxing wealth has not worked well in many countries, citing eight European countries which have abandoned wealth taxes since the 1990s due to high administrative costs, risk of capital flight, and the failure to meet redistributive goals.
Canada, currently the only G7 country without some form of inheritance, estate, or wealth tax, is now facing renewed political pressure to consider annual taxes on wealth, and polling suggests growing public endorsement of such proposals.[vi]
In China, as part of President Xi Jinping’s "common prosperity" programme aimed at narrowing an increasing wealth gap, new property taxes are being piloted in ever more cities to temper egregious property price rises.[vii]
However, whether these new taxes will actually materialise is a moot point. Indeed, in Switzerland, where inheritance and gift taxes are imposed by particular cantons and municipalities, an attempt in 2015 to federalise Switzerland’s inheritance tax system, by taxing legacies worth more than CHF2 million (US$2.15 million), was strongly rejected in a people's referendum by 71 per cent of voters.[viii]
2021 OECD Report
Given the OECD’s part in recent changes to international exchange of information between tax authorities and the global minimum corporate tax, their recommendations, made in a lengthy report last year, on inheritance and gift taxes may give an indication as to the direction of travel. These include:
tax being levied on recipients of wealth transfers, rather than on donors / estates, with low tax-free thresholds;
progressive tax rates factoring in total wealth received over an individual’s lifetime;
reform of reliefs, in particular the scope of reliefs for business assets;
allowing deferred or instalment payment options to overcome concerns about liquidity to pay the tax; and
strengthening reporting requirements.
Reform Of IHT In The UK
Reform of inheritance tax may be on the horizon in the UK. Indeed, an All-Party Parliamentary Group report published last year recommended a flat 10 per cent gift tax payable both on lifetime and death transfers to replace the UK's IHT system.[ix]
However, such radical reform of IHT appears unlikely. UK tax increases were announced last year; the rate of tax on national insurance contributions and company dividends are both due to increase by 1.25 percentage points from 2022 and, in addition, the rate of corporation tax is due to increase from 19 per cent to 25 per cent from 2023.
Furthermore, IHT receipts are low relative to certain other taxes (for example, in the 2019/2020 tax year IHT receipts were £5.2 billion compared to capital gains tax (CGT) receipts of £9.9 billion.
In addition, the UK Government has indicated that it is unlikely to introduce a wealth tax in any form (despite a report published in December 2020 by the “Wealth Tax Commission”, a group of academics and tax professionals, strongly endorsing a one-off wealth tax).[x]
Of late, the UK Government has preferred the more modest approach of increasing IHT revenue by freezing the IHT "nil rate band" threshold (set to stay at £325,000 until 2026, since 2009), which, with inflation, effectively widens the IHT net each year.
Reform Of Reliefs
That said, IHT reform is not necessarily off the table. Possible changes include, as recommended in a Government-commissioned 2019 report by the Office of Tax Simplification (OTS), a scaling back of IHT reliefs, for example, by making shares traded on the UK’s Alternative Investment Market (AIM) no longer eligible for business property relief (BPR) or redefining the level of trading activity required for BPR to bring it closer in line with the higher test used for gift holdover-relief for CGT.[xi]
The OTS has also recommended reform of IHT on lifetime gifting. Currently, there is no gift tax in the UK and individuals can gift assets to anyone without an IHT charge if they survive the gifts by seven years and do not retain a benefit from the gifted assets. Certain gifts, for example to spouses, are entirely exempt. Possible changes on the horizon include replacing the numerous lifetime gift exemptions with a single personal gift allowance; shortening the seven-year window during which gifts may become subject to IHT to five years; and ending relief for gifts made with the seven-year window but three years before death.
CGT "tax-free uplift" at death:
Another recommendation made in a separate report by the OTS on CGT, focused on reform of the CGT "tax-free uplift" at death.[xii]
In the UK, CGT is not payable on the transfer of assets on death (unlike lifetime transfers). Instead, assets are inherited at their market value at the time of death and any pre-death gains are ignored on a future disposal. As IHT is charged at death, the relief precludes what would otherwise be a double tax charge on death in respect of a deceased’s assets. Indeed, the OTS’ CGT report noted how the relief incentivises owners to delay asset transfers until death to mitigate the incidence of both IHT and CGT.
The OTS report also recommended a less distortive “no gain no loss” approach (except in relation to a person’s main or only home) so that, in effect, the beneficiaries acquire assets at their cost to the deceased. That change would pose administrative challenges, for example, in establishing a historical base cost even if, as suggested by the OTS report, rebasing to 2000 was allowed. Nevertheless, reform of the uplift remains a possibility, particularly in circumstances where assets benefit from IHT relief so that neither CGT nor IHT is paid at death and pre-death gains escape the tax net on later disposals.
The UK Government responded to the OTS reports on CGT and IHT at the end of 2021, saying that it had decided not to proceed with the proposed changes to IHT at present but did not rule out future reform of IHT. Furthermore, while accepting a few largely procedural recommendations on CGT, it would keep a handful of further technical changes to CGT under consideration, thereby keeping the door open to future reform.
Reform Of Estate Tax In The US
Interestingly, in the US the Democrats had made similar proposals to reform the “step-up” in basis cost of assets at death although these were dropped in legislation proposed in September last year by the House Ways and Means Committee, the chief tax-writing committee in the House of Representatives.
In addition, very significant reforms of US estate tax, which appeared to be imminent, were dropped in the new framework for the Build Back Better Act released by the White House on 28 October[xiii]. These included:
- a proposed reduction in the lifetime estate and gift tax exemption from US$11.7m per taxpayer to approximately US$6m from 2022. (Instead, the exemption will be US$12.06 million per individual for 2022 gifts and deaths, up from US$11.7 million in 2021, with increases allowed for inflation until 31 December 2025 when the exemption is due to revert to the original amount of US$5 million per person plus inflation, under the Tax Cuts and Jobs Act of 2017);
- the aggregation of grantor trusts (which are commonly used as estate planning vehicles in the US) with a taxpayer’s gross estate on death;
- treating sales between a grantor trust and its grantor as a taxable transaction; and
- removing the estate and gift tax valuation discount for transfers of entities holding non-business assets.
Although the Senate vote on the bill has now been delayed, some or all of these proposals could still be put back into the final version of the legislation and even if they are not, ultimately reform of US estate tax cannot be ruled out.
In the current climate, serious consideration is being given worldwide to reforming taxes on wealth although only time will tell whether such reform becomes a reality.
Matthew Radcliffe wrote this article looking at the landscape of global taxes. It was published in the IFC Economic Report 2022 and on IFC Media on 19 January 2022.
[xi] Office of Tax Simplification Inheritance Tax Review – second report: Simplifying the design of Inheritance Tax Inheritance tax review - second report (publishing.service.gov.uk)
[xii] Office of Tax Simplification Capital Gains Tax review – first report: Simplifying by design Capital Gains Tax stage 1 report - Nov 2020 - web copy (publishing.service.gov.uk)