There has been public debate over using wealth taxes as a way to fund the massive government spending during the Covid-19 pandemic. But one of the key targets of a wealth tax is inherited wealth and, as inequality is perceived to grow and we hear claims that today’s children will be the first to be poorer than their parents, the taxation of wealth transfers has also come into focus.
In the UK, the Office of Tax Simplification (OTS) reviewed inheritance tax and suggested potentially wide-reaching changes; the All-Party Parliamentary Group on Inheritance and Intergenerational Fairness has also proposed reform. So far, there appears to have been little political appetite to engage with this. But with the OECD now stepping into the fray with a comprehensive new report on inheritance and gift taxes across the OECD member countries, might this be about to change?
Highlights of the report’s policy suggestions include:
- a strong case for a tax levied on recipients of wealth transfers, rather than on donors (or their estates), with only a low tax-free threshold and limiting renewable gift tax exemptions such as the UK’s nil rate band;
- progressive tax rates taking into account the total wealth received over the individual’s lifetime;
- scaling back reliefs with (allegedly) no obvious policy imperative, such as reliefs on private pension savings and life assurance policy payments;
- reconsidering the scope of reliefs for business assets; and
- allowing payment in instalments or deferred payments to overcome concerns about liquidity to pay the tax.
The OECD suggest strengthening reporting requirements, and no doubt the declining popularity of cash, the increasing role for banks in monitoring the source of large transfers, and, in the UK, HMRC’s increasing power to demand information from banks will all assist with this.
The OECD’s track record in spurring change in the international exchange of information between tax authorities and pushing towards a global minimum corporate tax rate suggests that we should take their involvement seriously. Maybe the time has now come for a comprehensive reform of inheritance and gift taxes worldwide.
Wealth inequality has become an increasingly prominent topic in recent years. Wealth is highly concentrated at the top of the distribution, much more so than income, and income and wealth inequalities can be mutually reinforcing.