What is Inheritance Tax – Countries, Exemptions and How to Reduce It?
Assets of a person are distributed to their heirs as per the will after they have passed away. The transfer of wealth may result in inheritance taxes, which are paid by the beneficiaries or those who inherit the wealth. Here’s all you need to know about the inheritance tax. Read on!
What is Inheritance Tax?
An inheritance tax is levied on the assets inherited from a deceased person and is paid by the beneficiary. The inheritance tax varies for different assets and is determined by the quantum of the inheritance.
For example, assume that a person passes away and their movable/immovable assets (property, investments, jewelry, etc.) are inherited by their children, grandchildren, or any other beneficiary. In this case, those receiving the inheritance will have to pay an inheritance tax to the Government.
How Does the Inheritance Tax Work?
The inheritance tax is levied when a person divides their assets and distributes them among their heirs or beneficiaries. The tax is then calculated separately for each beneficiary, and they are responsible for paying the tax imposed on it.
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Where is Inheritance Tax Implemented?
The inheritance tax is levied in 24 OECD (Organization for Economic Cooperation and Development) countries and the majority of countries impose recipient-based inheritance taxes.
| S No. | Country | Tax Rate |
| 1. | Japan | 55% |
| 2. | South Korea | 50% |
| 3. | France | 45% |
| 4. | United Kingdom | 40% |
| 5. | United States | 40% |
| 6. | Spain | 34% |
| 7. | Ireland | 33% |
| 8. | Belgium | 30% |
| 9. | Germany | 30% |
| 10. | Chile | 25% |
| 11. | Greece | 20% |
| 12. | Netherlands | 20% |
| 13. | Finland | 19% |
| 14. | Denmark | 15% |
| 15. | Iceland | 10% |
| 16. | Turkey | 10% |
| 17. | Poland | 7% |
| 18. | Switzerland | 7% |
| 19. | Italy | 4% |
| 20. | Luxembourg | 0% |
| 21. | Serbia | 0% |
| 22. | Slovenia | 0% |
| 23. | Australia | 0% |
| 24. | Austria | 0% |
| 25. | Canada | 0% |
| 26. | Estonia | 0% |
| 27. | Israel | 0% |
| 28. | Mexico | 0% |
| 29. | New Zealand | 0% |
| 30. | Norway | 0% |
| 31. | Portugal | 0% |
| 32. | Slovak Republic | 0% |
| 33. | Sweden | 0% |
| 34. | Hungary | 0% |
The inheritance tax rate globally ranges from 10% to 55%, depending on the value of the inherited item. Japan has the highest inheritance tax rate in the world, at 55%, followed by South Korea (50%), Germany (50%), and France (45%).
China, India, Russia, Australia, Israel, and New Zealand, among a few others, have eliminated inheritance taxes to simplify their tax systems. In India, the inheritance tax system was abolished after 1985. However, do note that any income generated upon inheriting such assets is taxable under the Income Tax Act.
For example, suppose you inherit your parents’ mutual fund investments after they pass away. Although you won’t have to pay an inheritance tax on the investment, you will have to pay taxes on the income/profit generated from those mutual funds as per income tax norms.
Income Tax Implications of Inheritance
1. Tax on Income Arising from Inheritance
Inherited property can be a source of income for the beneficiary. Any income from inherited assets is added to the beneficiary’s annual income and is taxed as per the income tax slab they fall under.
2. Tax on the Subsequent Sale of the Inheritance
When a property is transferred to someone or is inherited by a person, they become the owner of the property. They can choose to sell the property or retain it. The capital loss or capital gain on inherited property also accrues to the legal heir. The holding period of the property determines whether the capital gains on inherited property are subject to long-term capital gains or short-term capital gains
3. Inheritance Tax on Immovable Property
In the case of obtaining movable assets, the beneficiary must follow specific processes as mentioned below:
- When inheriting a bank account, the account name must be changed to the account holder deceased. If you are the nominee, survivor, or legal heir, you will be allowed to withdraw funds.
- If you inherit a locker, the contents of the locker will be transferred to your possession. The bank will release the items to you in exchange for an indemnity. There is no tax imposed on it.
- If the asset is a fixed deposit, the new owner has the option of waiting for the FD to mature or closing the FD account early.
- In the case of inherited shares, depending on the mode of succession, you are required to pay income tax based on your returns.
In India, although you do not have to pay taxes on inheriting assets, you will be liable to pay taxes on the income generated from selling those assets. Under the Foreign Exchange Management Act (FEMA), an NRI can inherit property in India without paying inheritance taxes. If the inherited property is worth more than Rs.30 lakh, the new owner will be required to pay wealth tax which is levied at 1%.
How to Avoid/Reduce Inheritance Taxes
Inheritance tax planning is very important to avoid hefty inheritance taxes. Here are a few ways you can avoid or reduce inheritance taxes:
1. Gifting Assets to Family Members
Giving gifts throughout your lifetime is one strategy to decrease estate and inheritance taxes on the property. If you gift your assets and property to your family member while you are still alive, the quantum of assets in your estate will reduce, bringing the inheritance tax down.
2. Make a Will
If you make a will, it must be probated unless you can find ways to transfer property to avoid probate. In simple terms, unless the inheritance is under the benchmark decided for taxation of inheritance, a judicial process will be required to allow asset transfer. Probation isn’t allowed just by creating a will, other measures need to be taken for the property to pass outside of probate such as establishing a trust.
The court decides the worth of your property and who inherits it based on your will. The tax duty of the inheritor is determined by the value of the transferred asset and the relationship between the will-maker and the beneficiary. You can use your will to transfer all the assets to any close relative like your spouse to avoid inheritance taxes.
You can also leave your assets to a charitable foundation, transfer your assets to a trust for your heirs, or leave it to your spouse to reduce tax liability.
Inheritance Tax Exemptions
There are a few ways you can be exempted from inheritance tax on property:
- Entities that receive the assets as charitable donations and close relatives like spouses are exempted from paying the tax.
- If the assets are valued under a benchmark decided.
In India, tax is exempted on any kind of tax imposition arising out of the inherited property in the following ways:
- Section 54 of the Income Tax Act of 1961 states that the new owner can avoid paying capital gains tax if the capital gain on inherited property proceeds is invested in another property of equal or greater value.
- If the inherited property is worth more than Rs.30 lakh, the new owner will be required to pay a wealth tax of 1%. However, if it is a person’s only property, they will be exempt from the wealth tax.
Differences Between Estate Tax and Inheritance Tax
Inheritance tax and estate tax are not the same thing. Here are a few differences between estate tax and an inheritance tax:
| Inheritance tax | Estate tax |
| The tax a beneficiary pays on the assets inherited | The amount deducted from someone’s estate upon their death. |
| Levied on the quantum of inheritance inherited by the beneficiary | The estate pays the tax based on the value of the deceased’s estate |
| The tax is determined based on the net value of a deceased person’s property on the day of death | The tax amount is determined by the heir/existing beneficiary’s property value and his genuine relationship with the deceased person |
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Final Word
Inheritance tax is a tax levied on assets left to heirs/beneficiaries after a person passes away. Inheritance tax is imposed on the total value of the inheritance inherited by the beneficiary. Inheritance taxes on the property can be reduced or avoided by leaving the assets to heirs through trusts, or by gifting them to family members during one’s lifetime. The exemption is also decided by the country you live in.
FAQs on Inheritance Tax
Ans: All permanent and moveable assets passed down from ancestors, such as a great-grandfather, grandfather, or father, are termed inherited property. These include property, investments, precious metals, etc.
Ans: Inheritance tax was in force in India until 1985, and it was paid in slabs ranging from 10% to 85% of the property’s principal value. However, implementation and procedural difficulties led to its termination in 1985.
Ans: There is no income tax on inheritance in India. However, any income generated from subsequent investments of inherited assets or money is taxable.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
