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Inheritance tax

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(Redirected from Estate 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.

Contents

Australia

Death duty existed in Australia until 1981. In 1978 the then premier of the 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, 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Canada has not had an inheritance tax since it was repealed by Brian Mulroney's government in the 1980s.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.

Sweden

Sweden abolished the inheritence tax together with gift taxes in 2005.

United Kingdom

See main article Inheritance Tax (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. Given the plans made to avoid it, Inheritance Tax is a small, but remains by no means insignificant, revenue generator for the UK government, around 2.4bn in 2001. As of 2005 the rate is 40% on the value of all of an individual's estate over 275,000 (for the 06 April 2005-05 April 2006 tax year). This is known as the Nil Rate Band.

This excludes certain property including everything transferred to a spouse, charities, political parties and certain assets such as agricultural land and woodland.

United States

The U.S. federal government imposes an estate tax, calculated as a percentage of the part of the estate that exceeds the current exempted value. For 2005, an estate with a value less than $1,500,000 would not pay an estate tax and most likely would not have to file an estate tax return. Many U.S. states also impose their own estate or inheritance taxes (See state estate tax).

For estates larger than the current exempted amount, any estate tax due is paid by the executor or other person responsible for administering the estate. That person 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" are usually included in the taxable estate, even though such assets are not subject to the probate process.

The taxable portion of an estate can be reduced through charitable contributions or provisions that allow executors of some qualifying family-owned farms to reduce the taxable value of an estate's real property by some percentage of market value (up to certain limits) if certain eligible heirs continue to actively farm the property for over a decade.

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 one percent 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.

Debates

Some debates about the estate tax note the potential for double taxation, that is, the taxation on assets which have been taxed already. Double taxation occurs on earned income, but not the unrealized capital appreciation of houses, farms, stocks, bonds, real estate, and collectibles such as works of art. FactCheck.org cites a 2000 study of 1998 estate taxation, which determined that unrealized capital gains made up 36.3% of the value of all estates in 1998, and 56.4% of estates worth more than $10 million (but without taking into account yearly increases of inflation).

The debate about changes to or elimination of the estate tax sometimes revolves around which estates are affected by current law. The effects of the law on small business owners and family-owned farms was studied in an analysis undertaken by the Tax Policy Center. A study of the 18,800 taxable estates taxed in 2004 found 7,090 which had any farm or business income. Of those, there were 440 estates in which half or more of its assets were the value of farms and/or businesses. Perhaps surprisingly, the effective tax rate on the 440 estates studied in detail never averaged more than 23%.

Estate value

Number of
returns

Average tax
(in thousands)

Effective
tax rate

 
< $1 million
0
$0
0.0%
$1 - $2 million
190
$26
1.6%
$2 - $3.5 million
60
$190
7.5%
$3.5 - $5 million
40
$449
12.0%
$5 - $10 million
80
$1,322
19.3%
$10 - $20 million
50
$2,832
22.9%
> $20 million
30
$23,442
22.2%
All
440
$2,238
19.9%

Tax Rate Effect

Much controversy exists over the rate of estate tax, which in some cases exceeds 50% of the estate. In terms of the amount actually transferred, the effective transfer tax can exceed 100%. For example, if one assumes a net taxable estate of $2,000,000 (after exemptions), and a 50% estate tax rate, then the estate tax would amount to $1,000,000 and the effective transfer tax rate would be 100%. For a deceased American with four children, for example, the IRS would assess $1,000,000 for every $250,000 per child transfer bequeathed from the net taxable estate.

Related taxes

The US also imposes a gift tax, assessed in a manner similar to the estate tax. One obvious purpose is to prevent a person from easily avoiding paying estate tax by giving away all of their assets during their lifetime. However, an exemption is available for transfers of up to $11,000 per person per year. A single donor can make gifts up to this amount to as many people as they wish each year, so if they have enough people they wish to give assets to and/or enough time, they may be able to reduce their estate enough to avoid estate tax.

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.

Most U.S. states also impose their own estate or inheritance taxes. Together, the state and federal estate tax can exceed 50% of the gross estate, and therefore, can exceed 100% of the actual amount transferred or bequeathed. Because of this severe tax, it is said that, without planning, significant American fortunes are unlikely to last more than several generations - an original intent of the laws when passed in the progressive era.

External links

fr:Droits de succession

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