Next year, no matter how preoccupied the federal government is and no matter who is president, a new federal estate tax law is quite likely to be adopted. If it isn't, on Jan. 1, 2010, the U.S. federal estate tax will disappear at least for that one year. Then, on Jan. 1, 2011, rates will revert back to a mere $1 million exemption per person so that even the upper middle class would be taxed. The
Next year, no matter how preoccupied the federal government is and no matter who is president, a new federal estate tax law is quite likely to be adopted. If it isn't, on Jan. 1, 2010, the U.S. federal estate tax will disappear — at least for that one year. Then, on Jan. 1, 2011, rates will revert back to a mere $1 million exemption per person so that even the upper middle class would be taxed. The general view is that there will be a new law, and soon.
As federal lawmakers contemplate a new federal estate tax for the United States, it should be helpful to know what other countries are doing. So, here is a quick “A to Zed” around the world. Some countries are abolishing the tax; others are adding it; several just keep changing it.
On a practical level, advisors will find it helpful to know where global clients should be living at the end of their lives for the best tax treatment. All, except U.S. citizens, have the flexibility to choose a new tax jurisdiction by moving there. And in fact, people with fortunes are moving out of high inheritance tax countries.
A few technical notes: I'm looking only at the tax at death, referred to here as an “inheritance tax,” although a number of countries do have an annual tax on net worth, which often is referred to as a “wealth tax” (and usually is relatively small, 1 percent to 3 percent, and frequently changed). Also, in most cases a true inheritance tax has rates that vary based on the closeness of the relationship of the recipient to the decedent. Very few countries have a true estate tax, such as exists in the United States, which bases the rates only on the size of the assets held by the decedent. Also, very few countries besides the United States allow a deduction for gifts to charities as a way to reduce the inheritance tax.
SO, IF THE QUESTION IS “DOES THIS COUNTRY HAVE AN INHERITANCE TAX?” THE ANSWER IS:
Argentina — No inheritance tax.
Australia — No, it was abolished in 1979.
Austria — No, as of Aug. 1, 2008, there is no inheritance tax. This was not a policy choice. Instead, in 2007, the Constitutional Court of Austria held that although Austria could have an inheritance tax, the current system violated equal protection rights by using historical values for properties. The court ruled that unless the legislature enacted new legislation, the current inheritance tax would cease to have effect at the end of July 2008.
Is this likely to change? Michael Sedlaczek, an Austrian lawyer, says that it's difficult to predict. Discussions seem to focus more on increasing the income tax base, especially with respect to capital gains. Sedlaczek thinks it is unlikely that an inheritance tax will be reintroduced, although the general elections in September may change political inclinations. He also notes that Germany already has canceled its double tax inheritance treaty with Austria.
Bahamas — No inheritance tax (as is the case with most so-called “tax havens” or “offshore financial centers.”)
Belgium — Yes, and it varies by region (rates can reach 80 percent, depending on the amount and the closeness of the relationship). But lifetime gifts of personal property (not real property) are taxed at a maximum of 7 percent.
Alain Verbeke, a Belgian law professor and attorney, notes that gifts made more than three years prior to death are generally exempt from the inheritance tax. Verbeke gives a few examples: In the Flanders region, a family dwelling is exempt when left to the spouse, and all three regions (Flanders, Wallonia and Brussels) give preferential treatment to family businesses, either exempting them entirely or applying a very favorable rate.
Bermuda — Yes (called a “stamp duty”) on Bermuda-based assets only (including yachts with a Bermuda registry), with a maximum rate of 15 percent.
Michael McAuley, a Bermuda-based lawyer, notes that the stamp duty does not apply to “non-Bermuda dollar assets, bequests to spouses, bequests to registered or approved charities, and the value of any Bermuda residential property designated as a primary family homestead.” McAuley advises Bermudians to convert any Bermuda bank accounts into U.S. dollar accounts to avoid the stamp duty, and to be sure to file a declaration for the primary family homestead. The stamp duty is applied to the assets (like an estate tax), not to the individual heirs.
Brazil — Yes, depending on the state. Sao Paulo, for example, has a 4 percent inheritance tax.
Canada — No inheritance tax, but when the inheritance tax was abolished on a federal basis in 1972 and by the various provinces until the final one (Quebec) in 1986, it was replaced by a capital gains tax imposed at death as if there had been a sale of all of the decedent's assets immediately prior to death. That was felt to be more effective than a U.S.-style estate tax.
The impact of the change meant that the inheritance double tax treaty between the United States and Canada no longer applied, an unfortunate situation that lasted a number of years until the income tax treaty was amended to include the Canadian income tax that applies at death.
Canadian lawyer Martin Rochwerg notes that in the early years, the federal revenue loss was considerable, as the deemed cost of assets had been given the fair market value as of Jan. 1, 1972, which is why the various provinces delayed their various repeals of the inheritance tax. Rochwerg notes that the rates have changed since 1972: “One-half of a capital gain is presently (as it was at inception) included in income for tax purposes, although the proportion has been as high as three-quarters at times during the intervening years.”
Chile — Yes, with rates up to 35 percent.
China — Not yet. China has considered enacting an inheritance tax, but there has been too much uncertainty about property ownership, a threshold issue. This uncertainty may be eliminated, because China did enact a private property ownership act in 2007. Effective on Oct. 1, 2007 the new law protects private property and creates a system of public registration of real property ownership. Interestingly, China did enact an inheritance tax in 1950 but never enforced it. Current concerns about the dramatic gap between the rich and the poor are mentioned as the reason China should enact (and enforce) an inheritance tax.
Colombia — Yes, with rates up to 40 percent.
Costa Rica — No inheritance tax.
Denmark — Yes, with rates up to 40 percent (an “estate” tax replaced the prior “inheritance” tax).
Finland — Yes, with rates up to 16 percent.
France — Yes, with rates up to 40 percent. As of Aug. 22, 2007, there has been no inheritance tax on transfers to spouses. Parisian notaire Caroline Deneuville says that if gifts to children are made (and registered) more than six years prior to death, there is no inheritance tax on those amounts.
Germany — Yes, with rates up to 50 percent. It's worth mentioning that Germany applies its inheritance tax if either the decedent resided in Germany or the beneficiary resides in Germany (if neither is true, the tax applies only to certain property situated in Germany).
German lawyer Bernhard von Braunschweig has this update: Right now, the situation is very confusing because a substantial reform of the inheritance tax is under way. As in Austria, the Constitutional Court has found problems with the current system (based on disparate valuation rules) and has given the legislature a Dec. 31, 2008, deadline to correct the tax or it will no longer be in effect. While the federal government has put forward a proposal for legislation, there is still a serious political controversy going on over a number of elements of the proposed legislation, and it is not certain what the new legislation will eventually be and whether it will be in place in time.
Greece — Almost none; as of January 2008 Greece reduced the maximum rate to 1 percent.
Iceland — Yes, with a maximum rate of 5 percent.
India — No, the inheritance tax was abolished effective 1985.
Ireland — Yes, with rates up to 20 percent. Referred to as an integrated capital acquisitions tax (CAT), it applies to gifts and inheritances. Amounts to spouses are exempt. The tax-free amount for a child is €521,208, with any excess taxed at 20 percent.
Irish lawyer Paraic Madigan notes that since November 2000, the liability for the tax depends on the Irish tax residence status of either the donor or the beneficiary. The prior rule was that only the domicile of the decedent mattered. Reduced CAT rates apply to qualifying business, agricultural and residential property.
Israel — No, it was abolished in 1981. Israeli lawyer Alon Kaplan reports that there were suggestions to reintroduce it in 2002, but the Israeli Parliament did not agree. There was, though, a change in the gift tax in 2003, says Kaplan. From then on, complete exemption from a gift tax is allowed only for family member recipients who reside in Israel.
Italy — Yes, then no, and now yes again. The inheritance taxes that were abolished by then-Prime Minister Silvio Berlusconi in 2001 were put back into effect in January 2007, although the current maximum rate is only 8 percent. Italian lawyer Carlo Dalla Vedova summarizes the current law: A spouse and each child can receive €1 million before there is a tax, which is 4 percent on the excess; each sibling can receive €100,000 Euros with a 6 percent tax on the excess; any beneficiary with a disability can receive €1.5 million with a 6 percent tax on the excess; and any others are taxed at 8 percent. At least that is how things stood in Italy when this article went to press.
Japan — Yes, although the top rates were reduced in 2003, from 70 percent to the current 50 percent. Continuing with this “reform,” in the fiscal year 2009, the Minister of Finance announced that “a scheme to postpone payment of inheritance tax on stocks without quoted market price” is to be created (to be retroactively applied to inheritance on or after the enforcement date (Oct. 1, 2008) of the law to smoothen succession of small- and medium-sized businesses).
Japan may be the only country in the world that imposes the inheritance tax calculated as if the statutory heirs actually received all of the assets, and in the prescribed shares. It makes no difference to the tax calculation that others may have received the assets (after the amount is calculated, it is divided proportionately among those who actually received the assets). That change has been in effect since 1954, when the Minister of Finance realized that some people had been making their wills to minimize their inheritance tax.
According to Japanese lawyer Hitomi Sakai of the Kojima Law Offices in Tokyo, the government is now reviewing this method and is considering imposing the tax based on who actually receives the assets. Such a change would create new planning opportunities in Japan.
Liechtenstein — Yes, but it has both an estate and an inheritance tax. The estate tax has rates up to 4 percent. The inheritance tax has rates up to 27 percent, according to the government website for the principality of Liechtenstein.
Luxembourg — Yes, with rates up to 15 percent. But inheritances by direct descendants and ascendants are exempt from the tax. Also exempt is the inheritance of a spouse if he or she had common children with the deceased.
Mexico — No, the federal inheritance tax was abolished in 1962. But Mexican notario Francisco Fernandez Cueto adds that when real estate is inherited, the 32 states (and one federal district) are likely to add a transfer of real property tax, which varies by jurisdiction. Also, there is a federal income tax of 25 percent, when a foreign national inherits real property in Mexico; for a Mexican heir the tax, which can reach 28 percent, is not imposed until a subsequent sale (when carryover basis applies.)
Monaco — Yes, with rates up to 16 percent.
Netherlands — Yes, with rates up to 68 percent (the maximum rate for spouse and children is 27 percent). Only 25 percent of the value of family businesses is taxed.
Dutch civil law notary Pieter van Onzenoort adds that the government is contemplating an inheritance tax reform that would enter into force on July 1, 2010, and that it is unclear what exact shape this law might take. One suggestion has been that the spouse-children top rate be reduced to 20 percent and the rate for others to 50 percent. Another suggestion has been to apply the tax based on the recipient's residency (in addition to the decedent's residency).
An unusual feature of the current Dutch tax is that it applies to a Dutch national who moves away but dies within 10 years. If the proposal to also tax based on the residence of the recipient is adopted, there could be a tax even if the decedent had moved away more than 10 years earlier.
New Zealand — No inheritance tax.
Norway — Yes, with a maximum rate of 30 percent.
Portugal — No, it was abolished in 2004 for close relatives. Other death time transfers are charged a “stamp duty” of 10 percent.
Russia — No, it was abolished effective Jan. 1, 2006.
The prior inheritance tax rates ranged from 5 percent to 40 percent. In a 2005 statement supporting the repeal, then-President Vladimir Putin said, “Billion-dollar fortunes are all hidden in off-shore zones anyway and do not form part of people's inheritance. Meanwhile, people have to pay sums they often cannot even afford here just for some little garden shack.”
An article in September 2008 in the London newspaper, The Telegraph, led with: “For the first time in Russia's history, over 100 youngsters stand to inherit more than $1 billion from the country's burgeoning ranks of oligarchs.”
Qatar — No inheritance tax.
Saudi Arabia — No inheritance tax.
Singapore — No, it was abolished effective February 2008. (Prior to that the top rate had been 10 percent.)
Spain — Yes, with rates up to 34 percent. Spain also has several noteworthy “deductions” such as a deduction of 95 percent of the value for a family business (provided it is not sold within 10 years). The inheritance tax system is somewhat complicated as there is a “federal” (state) tax and there are separate taxes imposed by the 17 different “communities.”
As Spanish lawyer Manuel Jorge Martinez Ibanez explains: The autonomous community tax will apply if the decedent had been a resident there during the preceding five years; otherwise, the state inheritance law will apply. It is possible that both would apply. Additional state deductions of 95 percent apply to a family property up to a maximum value of €122,000 (provided it is not sold within 10 years) and another 95 percent deduction for special “Historical Spanish Patrimony” (provided it is not sold within 10 years).
There might be some competition among the communities, such as has happened within the United States at times. Recently various communities have been reducing the applicable tax amount by as much as 99 percent.
Sweden — No, the inheritance tax was abolished effective January 2005. In a fascinating 2007 study by Professor Henry Ohlsson, in the Economics Department of the University of Uppsala, he found: “Gifts, inheritances, and estates were never important sources of tax revenue. Such revenue as a share of GDP reached a peak already in the 1930s. These taxes became symbols for the ideological tension between the political left and the political right. Arguments about equity and equality of opportunity stood against property rights arguments.”
Switzerland — Yes, and it varies by canton (of which there are 26), with rates from zero (the canton of Schwyz has no tax) to 60 percent. No canton imposes a tax on bequests from a Swiss decedent to a Swiss spouse, although some do if the decedent is not Swiss. Swiss lawyer Edgar Paltzer notes that there is a general effort among the cantons to become more consistent with each other.
Taiwan — Yes, with rates up to 50 percent, but this may change soon.
In July 2008, the China Economic News Service reported, “In view of the global trend to scrap inheritance tax, the tax reform commission under the Ministry of Finance (MOF) is considering to cut the inheritance to 20-40%, down from 50% now, so as to develop Taiwan into a wealth management center.” In August 2008, The China Post said that there was a new proposal to encourage Taiwanese to bring money back into the country that would be in a “love Taiwan fund” and, as such, would generally be exempt from the inheritance tax. The China Economic News Service reported on Oct. 3, 2008, that the current proposal was to cut the rate to 10 percent. Finally in a “stop the press” update, on Oct. 6, 2008, Taiwan News reported that: “The government's tax-reform commission is meeting today to discuss a cut in the inheritance and gift taxes, as a possible antidote against the recent slump in the stock market.
When the U.S. Congress at first failed to pass a financial bailout package, world stock markets, including Taiwan's, crashed, inspiring the Taiwanese government to consider several measures. One is a cut in the inheritance and gift taxes, though the size of the cut had not been decided at press time. The government is suggesting three possibilities: a reduction from 50 percent to 10, 15 or 20 percent, which would result in losses for the treasury estimated at between NT$16 billion and NT$20 billion.”
United Arab Emirates — No inheritance tax.
United Kingdom (England, Wales, Scotland and Northern Ireland) — Yes, the United Kingdom has an inheritance tax that is a combined gift and estate tax with a top rate of 40 percent. There is an exempt amount of £312,000 (which increases for inflation); there is no tax for transfers to spouses and there is relief, up to 100 percent, on the value of agricultural and business property.
In an interesting approach to encouraging lifetime gifts, outright gifts are not taxed at the time of the gift but are brought back in to account for the inheritance tax if the donor does not survive seven years after the gift is made. U.K. solicitor Martyn Gower reports he is of the opinion that the logic behind the tax of subjecting assets to a charge once a generation has rather lost its way and although the government claims it affects the estates of only one out of every 15 people who died, there are strong arguments for suggesting the tax will need to be reviewed soon.
United States — Yes, with current rates up to 45 percent. This is a federal tax (some states add their own tax). The tax is imposed on the estate not the heirs, and allows an unlimited deduction for amounts left to a U.S. citizen spouse, as well as unlimited deductions for bequests to qualified charities. The entire estate tax structure is set to expire at the end of 2009, when the exclusion amount will have been increased to $3.5 million. That means no federal estate tax during the year 2010. But there's an automatic reinstatement on Jan. 1, 2011 of the estate tax structure as it existed in 2001, which means a maximum rate of up to 60 percent (including the 5 percent surcharge at $10 million) and an exclusion amount of only $1 million. It is generally expected that the estate tax will be amended in 2009.
Venezuela — Yes, with rates up to 50 percent.
Zimbabwe — Yes, but in 2008 the top rate was reduced from 20 percent to 5 percent. (And that gives us the “Zed.”)
So, that leaves clients with a serious planning question: to move or not to move? And, on a policy level, U.S. lawmakers should ask: to tax or not to tax?
Barbara Hauser is the director of Private Wealth Advisory for Stanford Group (Suisse) AG in Zurich, Switzerland