Inheritance tax

Inheritance tax, also known in some countries outside the United States as a death duty and referred to as an estate tax within the U.S, is a form of tax levied upon the bequest that a person may make in their will to a living person or organisation. If a bequest is made to a charitable organisation, most countries do not apply the tax. The tax is also imposed on other transfers of property made as an incident of the death of the owner, such as a transfer of property from an intestate estate, or the payment of certain life insurance benefits.

Australia

Death duty existed in Australia until 1981. In 1978 the then premier of the Australian state of Queensland, Sir Joh Bjelke-Petersen abolished inheritance tax in his state. Quotes made by Sir Joh at the time seem to indicate that this was partly intended to encourage business people and others from the more populous southern states to move to Queensland.

The then prime minister of Australia, Malcolm Fraser endorsed this action (some feel as a method of boosting flagging electoral support) and abolished Federal inheritance tax in 1978 as well. By 1981 inheritance tax had been abolished in all Australian states and territories.

Australia continues to have no inheritance tax.

Canada

Canada has not had an inheritance tax since it was repealed by Brian Mulroney's government in the 1980s. It's treated as a sale.

Hong Kong

Hong Kong has an inheritance tax, but there is opinion to abolish it.

United Kingdom

In the United Kingdom, Death Duty was first introduced as a tax on estates in England and Wales over a certain value from 1796, then called legacy, succession and estate duties. The value changed over time and the scope of estate duty was extended. By 1857 estates worth over £20 were taxable but duty was rarely collected on estates valued under £1500.

Estate duty was replaced in 1975 by Capital Transfer Tax , which was replaced by Inheritance Tax (IHT) in 1986. Inheritance Tax is a significant revenue generator for the UK government, around £2.4bn in 2001. The current rate is 40% on the value of all the estate over £263,000. However, as the estate of a deceased person includes all of their worldly belongings, such as houses and the like, many people can fall foul of this tax. On death there is a minimum of 12 months of probate, during which solicitors assess the value of the estate and consider challenges. If there is insufficient cash to pay the tax and the solicitors' bill, then assets must be sold.

In order to avoid the tax, many people with large estates will practice some or all of the following avoidance measures:

• The giving of money in a trust (property) fund before death.
• The giving of money before death (subject to a maximum before tax applies of some £5000 a year)
• Transferring assets to a spouse

Generally, gifts made seven years before death are exempt from inheritance tax

United States

The federal government imposes an estate tax, which is calculated as a percentage of the net value of the estate after certain credits and deductions. The tax is paid by the executor or other person responsible for administering the estate, who is also responsible for filing a return with the Internal Revenue Service. The return must contain detailed information as to the valuations of the estate assets and the exemptions claimed, to ensure that the correct amount of tax is paid.

Life insurance benefits generally form part of the gross estate for tax purposes, if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy. Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death" may be included in the taxable estate, even though such assets are not subject to the probate process.

The US also imposes a gift tax: transfers of $11,000 per person per year are exempt. The gift tax is assessed in a manner similar to the estate tax: an upshot of this is that a person will not be able to avoid taxes on his or her estate by transferring property while alive.

Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.

Many of its opponents refer to the estate tax as the "death tax" and have called for its abolition. Since 2002, the top rate has dropped from 50% by 1 per cent. per year; it is scheduled to drop to 45% in 2009, thence to 0% in 2010, but as of 2005, if no further changes in the law are enacted, the tax will be reimposed at a top rate of 50% in 2011. It is, however, expected that Congress will enact legislation to change this in the intervening period.