As the old saying goes, only two things in life are certain: death and taxes. Yet around the world, inheritance tax (IHT) is a particular source of confusion for HNWs, with some countries doubling down on IHT and others doing away with estate levies altogether. Austria got rid of death duties in 2004, while Sweden and Singapore abolished their own inheritance taxes in 2008.
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While IHT is sometimes dubbed the ‘most hated tax in Britain’ in the UK press – there were calls on Rishi Sunak from Jacob Rees-Mogg and Nadhim Zahawi in the Telegraph to abolish it in the run-up to the 2024 election – it has also become a lightning-rod topic in international politics. India’s two largest parties accused each other of seeking to implement the levy as the nation went to the polls in April: prime minister Narendra Modi said IHT policies ‘sow discord and block every road to equity, they create hatred and destabilise the economic as well as social fabric of a nation’.
In the US, the IHT debate has been polarising for Democrats and Republicans. Democrat senators including Elizabeth Warren are pushing for more restrictions on the way trust structures are used by American HNWs to avoid estate taxes – though the Republican Party has been behind a huge effective IHT cut for the wealthiest Americans in recent years. In 2017 the estates tax threshold was raised by then-president Donald Trump from $5 million to $10 million, and it now sits at more than $13.6 million. Only the richest (less than 0.1 per cent) of American estates qualify, and the attractive regime is leading many American non-doms currently in the UK to consider returning home, Withers tax partner Jaime McLemore tells Spear’s.
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Political debates on IHT around the world often hinge on ideological leanings and notions of ‘fairness’. In Britain an Ipsos poll from 2023 found the levy was viewed as the UK’s ‘least fair tax’, with only 23 per cent of people considering it fair. Yet when countries have ditched IHT levies in the past, policymakers have tended to focus on economic outcomes rather than ideology. For Singapore, getting rid of death duties in 2008 was seen as a move to increase international competitiveness, with the country’s then-finance minister (and current president) Tharman Shanmugaratnam suggesting that removing the tax would encourage wealthy foreigners to bring their funds into the country.
The state of IHT in the UK
In the UK, the impact of greater IHT liabilities on wealthy non-doms under the new foreign income and gains (FIG) regime from next year is likely to be mixed, says international tax and migration adviser David Lesperance. While those of working age who are temporarily in the UK may not be threatened by the new IHT rules if they know they’re ‘going to go back to where [they] came from or [will] move on somewhere’, he predicts the richest UHNWs will abandon the UK en masse – which could leave a significant dent in the UK’s tax coffers.
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‘If you look at the Sunday Times Rich List, they’re going to leave. I’ll use [Rishi Sunak’s wife Akshata] Murty as an example. The year before she volunteered to no longer be a non-dom, she paid £4.4 million in UK tax.’ The contributions of a small number of UHNWs really do make a big difference, in other words.
For this reason, policymakers might want to consider what they’re ‘trying to achieve’ when reducing IHT or bringing more people into the net, says Arun Advani, head of the Wealth Tax Commission. ‘What is the goal of getting people in, what are they providing in the first place? Is it that they’re coming to work, is it that they’re coming to invest?’
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In the UK, while the threshold of £325,000 before IHT kicks in is far less generous than the US’s $13.6 million, various reliefs can be significant for HNWs.
Along with HRMC’s ‘seven-year rule’ – the point at which unlimited lifetime gifts become tax-free – agricultural and business property reliefs (known as APR and BPR) can also lead to substantial savings for wealthy UK residents who plan effectively. For non-doms, current exemptions on foreign property can also be enticing.
‘We await to see the government’s next move on whether they will be tempted to restrict these reliefs – for example by removing the BPR for AIM shares – in an attempt to raise more revenue to fund public spending,’ says Russell Cooke tax partner Julie Man.
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Aside from international competitiveness, there’s also an ongoing debate over whether IHT rates reduce or exacerbate economic inequalities. In a paper Advani published for the Institute for Fiscal Studies in September 2023, he found inheritance taxes only had a marginal impact on wealth disparities by the time most people receive any substantial funds from their parents – usually in their fifties.
In Australia, where IHT was abolished more than 40 years ago, a report by the Productivity Commission think tank found that wealth transfers gave a ‘much bigger boost’ to those with less wealth – but did not have a significant impact on inequality.
Inheritance taxes with different rules and various loopholes are difficult to justify, Advani says: ‘You end up with a huge range of rates that people are paying, just depending on what kind of assets their parents own.’ While the poorest fifth of UK residents in their fifties tend to have less than £400,000 in wealth, the richest fifth tend to have above £800,000. ‘The bottom fifth [inherit] £2,000 on average – so really nothing – and the richest get about £380,000. Of that £380,000, IHT is taking about £38,000. And so the effect is that, before you inherit anything, you’re twice as well off if you’re in the top fifth, and when you inherit you would be three times as well off. It’s really doing very little… it’s too little, too late if your goal is social mobility.’
Even though just one in 20 UK estates qualify for IHT, 55 per cent of Britons would support abolishing the tax, according to a recent YouGov survey commissioned for law firm Kingsley Napley. That might have something to do with the fact that HMRC’s take-in from IHT is climbing, hitting a record £7.5 billion in the 2023-24 tax year. It remains prudent for HNWs to seek pre-emptive advice – before it’s too late.
