Inheritance tax

Inheritance tax is a financial levy applied to the transfer of wealth after a person dies. In international tax law, a technical distinction exists between an inheritance tax and an estate tax. An inheritance tax is paid directly by the person who receives the money or property. In contrast, an estate tax is a levy placed on the entire collection of assets left by the deceased. However, these definitions are not always strictly followed in practice. For example, the United Kingdom uses the term "inheritance tax," but it is technically an estate tax because it targets the assets of the deceased.

Taxation mechanisms vary significantly depending on the legal jurisdiction. Some countries do not use an inheritance tax at all. In Canada, for instance, there is no inheritance tax, but any unrealized increase in an asset's value is subject to capital gains tax. This means the tax is triggered when the asset is eventually sold. Other nations, such as Austria, apply a tax similar to a gift tax upon death. In jurisdictions that use both gift and inheritance taxes, the inheritance is usually exempt from the gift tax to avoid double taxation. Some systems also include "lifetime chargeable transfers," which are gifts made to trusts during a person's life that are still subject to inheritance tax laws.

Historical trends show that the prevalence of these taxes has fluctuated over time. There was a steep increase in the number of countries implementing inheritance taxes during the 19th and early 20th centuries. This era saw many nations adopt these laws to manage wealth distribution. However, after 1960, the trend reversed as numerous countries began to repeal their inheritance taxes. This shift has led to different colloquial terms in various regions. In the United Kingdom and some Commonwealth countries, people still informally refer to these levies as "death duties." Similarly, the estate tax in the United States is sometimes called a "death tax."

Different countries apply specific rates based on family relationships and asset values. In Denmark, the estate duty is collected at the state level with rates varying by kinship. A spouse pays 0%, while children pay 15%, and other relatives may pay 15% plus an additional 25% of their individual sum. Sweden and Finland use a progressive system where close family members receive tax-free thresholds. In Sweden, inheritance is tax-free up to €20,000, while in Finland, the threshold is €100,000. Beyond these amounts, rates increase in several steps. In Finland, the maximum rate can reach 45% for amounts exceeding €1.8 million.

Some nations have extremely high rates or unique structures for their tax systems. Japan currently holds the highest inheritance tax rate in the world, with national taxes ranging between 10% and 55%. This is applied after a deduction of ¥30 million plus ¥6 million per heir. The impact of high rates can be seen in major corporate successions. In 2020, the heirs of Samsung Group chairman Lee Kun-hee in South Korea faced a $10 billion inheritance tax bill. This was calculated at a 50% taxable amount. In Greece, the tax is divided into three categories of heirs. Category A, including spouses and children, pays between 0% and 10%, while Category C can face rates up to 40%.

Economic and social arguments often drive the debate over these tax policies. Supporters of inheritance taxes argue they reduce discrimination between income earned from labor and income received through inheritance. They suggest that taxing large transfers of wealth prevents nepotism and aligns better with capitalist values. Conversely, opponents argue that these taxes create a sense of loss aversion regarding kinship. Some also argue that different tax treatments for trusts versus natural persons are inequitable. The philosopher Georg Hegel even viewed families as legal persons, a concept that influences German inheritance laws for family firms.

Understanding inheritance tax requires looking at how it connects to broader economic systems. It is closely linked to capital gains tax, gift tax, and land value tax. In some places, like Ukraine, there is no inheritance tax, but the inheritance is treated as ordinary income subject to personal income tax. In others, like Brazil, the state can charge progressive rates for the ITCMD, though the Senate limits the maximum rate to 8%. These complex rules demonstrate how governments attempt to balance the rights of families with the needs of the state's economy.