“Raise inheritance tax”, says the OECD. Governments won’t need to be told twice

The Paris-based Organisation for Economic Co-operation and Development (OECD) is urging its 37 member states to raise inheritance taxes as a way to increase tax revenues to repay debt in the wake of the pandemic.

In a report published last week – Inheritance Taxation in OECD Countries – the OECD notes that according to most recent figures, an average of just 0.5% of overall tax revenues were generated from inheritance or estate taxes levied by the 24 of the 36 OECD members examined in the report who actually have such taxes (eight, including New Zealand, Australia and Sweden, don’t have estate or gift taxes). The UK is on the higher side, but still well below 1%.

“While a majority of OECD countries levy inheritance and estate taxes, they play a more limited role than they could in raising revenue and addressing inequalities, because of the way they have been designed,” says Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration.

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The report sheds light on the widespread differences in IHT rules between countries. People in Belgium can transfer just €17,000 tax-free, which means that nearly half of all estates in Belgium are subject to estate taxes. Whereas in the US, more than $11m in some cases can be handed over without incurring taxes, and just 0.2% of estates pay them.

The report is part of a wider OECD look at the taxation of wealth (or “a broader work stream on capital taxation”, as the authors put it) and how to go about it in the post-pandemic world. Perhaps unsurprisingly, it argues that “well designed” inheritance taxes can be a useful tool for revenue raising, particularly as it is easier to collect compared to other types of wealth taxes, and reducing inequality, particularly if asset prices keep rising.

It’s a long report, but overall the OECD argues in “favour of an inheritance tax levied on the value of the assets that beneficiaries receive, with an exemption for low-value inheritances”. It also suggests that introducing an inheritance tax on the overall amount of wealth received by beneficiaries over a lifetime would be “particularly equitable and reduce avoidance opportunities”. Of course, that would also increase administrative and compliance costs.

Meanwhile, the OECD also suggests getting rid of various exemptions. “Scaling back regressive tax reliefs, better aligning the tax treatment of gifts and inheritances and preventing avoidance and evasion are also identified as policy priorities”.

So in short, the OECD rates inheritance tax as a form of wealth tax and thinks it should a) be used to raise more money; and b) should come with fewer exemptions.

Here is why inheritance tax will rise in the UK

Now, we’re not interested in arguing the politics of all this. People generally dislike inheritance tax, not least because of its highly unwelcome timing. But the OECD reckons the best way to bypass that is by “framing inheritance tax reforms around issues of fairness and equality of opportunity”.

The point for investors to get their heads around is that this is just yet another step towards broader and more intrusive taxation policy on the behalf of governments everywhere. It’s also another step towards the more aggressive taxation of wealth – and, unfortunately, the chances are we won’t see an offsetting reduction in income taxes (which would arguably go further towards helping with the equality issue) to go alongside that.

So while the OECD doesn’t have any binding authority over the governments’ inheritance tax policies, that doesn’t matter. If you’re an investor or a homeowner or both or you plan to be in the future, you should get used to the idea that you’re going to have to pay some attention to inheritance tax planning at some point in your lifetime.

Why? Well it’s already been rising in “real” terms (ie after inflation) for a long time. The nil rate band has been sitting at £325,000 since 2009, and was frozen again in the Budget this year until at least 2026.

There have been changes related to the inheritance of the family home which temporarily diminished the effects of this freeze, but that’s now behind us. So the inheritance tax take will start rising even in the absence of any further changes.

Meanwhile, the Office for Budget Responsibility predicted that the Covid pandemic may generate a 20% spike in the number of families facing huge inheritance tax bills, because of the many unexpected deaths that have taken place in recent months.

In short, it’s worth at least understanding what the current rules are; how you can minimise your potential inheritance tax bill; and what the implications are for your financial planning and retirement funds. For a more detailed look at inheritance tax, subscribe to MoneyWeek today –we have a free inheritance tax report for new subscribers, plus you get your first six issues free.