Taxing inheritance can play an important role in helping government raise revenues while addressing inequalities in society and efficiency, according to a report for the OECD, published on Tuesday.
Inheritance is likely to reinforce the inequitable concentration of wealth in the hands of wealthier people and families, according to the Organisation for Economic Co-operation and Development study.
The report says the value of inheritances and gifts the wealthiest 20 per cent of households receive is close to 50 times higher, on average, than those reported by the poorest 20 per cent of households.
Inherited wealth accounts for a greater share of families total wealth in some countries over recent decades, it notes. With the baby boom generation getting older, the report says the number of inheritances are likely to increase and become larger as trends in the price of assets continue.
But with people living longer, the age at which people inherit is likely to continue to rise.
In dollar terms, across the OECD, the average inheritance for the wealthiest families is $190,113 (€156,376) compared with $3,917 (€3,222) for the poorest fifth of households.
The value of wealth that can be transferred tax-free from parents to their children ranges from $17,000 in Belgium to more than $11 million in the United States.
Children’s threshold
Irish families can leave up to €335,000 to each of their children before those children face any tax bill. However, that figure falls to €32,500 for other close relatives and to €16,250 for more distant relatives or friends.
Ireland is among a small group of countries with a significant gap between the treatment of direct descendants and others. The OECD argues that this should be narrowed, effectively by reducing the level of tax exemption for children.
About a third of households across all OECD countries receive an inheritance, but the report states that there can be big difference in the likelihood of wealthier families inheriting compared with the less wealthy. That gap is largest in Ireland, with about 60 per cent of the wealthiest families passing on inherited wealth compared with just 10 per cent among the least-well-off families.
Twenty-four of the 37 OECD countries have an inheritance tax, with a further nine having abolished them in recent decades. But even where they do exist, only a very small share of tax revenues come from these sources.
In Ireland, inheritance tax accounts for a greater share of overall tax revenue than in most other OECD states but it still accounts for a fraction of 1 per cent of the overall annual exchequer tax take.
The report notes that the Covid-19 crisis will put governments under pressure to raise more revenues and address inequalities.
“The crisis has exacerbated existing inequalities and hit many vulnerable households harder,” the study states. “Traditional revenue-raising approaches, such as raising taxes on labour income and consumption, as was done in the wake of the 2008 global financial crisis, may be less desirable from an equity and growth perspective.
“The crisis will likely prompt reflection on the need to turn to new or under-utilised sources of revenue, which may also be compatible with inequality reduction objectives,” the report says in a pointed reference to inheritance taxes.
Recommendations
Ireland meets several of the criteria that the report suggests for reform of inheritance tax to make it more equitable. These include the taxing of beneficiaries rather than estates. Ireland also operates a cumulative system, where inheritances and large gifts (those above €3,000) are added to each other to see if a beneficiary exceeds a tax-free threshold.
However, that cumulative system is tiered. That means that while lifetime tax-free inheritances are generally modest, there is a disproportionately large threshold for children inheriting from parents.
Successive governments have defended this position on the basis that, for most families, the family home accounts for the majority of one’s estate. A lower threshold was seen as forcing children inheriting a family home from a parent to sell it to meet the tax liability.
Scaling back tax exemptions and reliefs is seen by the OECD as key to strengthening the revenue-raising potential, efficiency and equity of inheritance and gift taxes, as is addressing loopholes or specific tax structures that encourage or facilitate tax avoidance and are generally open to more wealthy families.
It also proposes that tax rates should be “progressive”, meaning they would increase as the amount a beneficiary receives rises.
“Inheritance taxation is not a silver bullet, however,” said Pascal Saint-Amans, director of the OECD centre for tax policy and administration. “Other reforms, particularly in relation to the taxation of personal capital income and capital gains, are key to ensuring that tax systems help reduce inequality.”
