Why should we pay inheritance tax?

Kanisa George

THE LEAD-UP to the local government elections was filled with the usual dose of scandal, views on stand-your-ground legislation and, of course, the role of the Elections and Boundaries Commission.

While voters prepared to face the polls on Monday, there was one topic steeped in much controversy that came in from left field. Although job security, crime and proper representation continue to outlive the 24 hours news cycle, there has been far much ado about inheritance tax.

Taxation is nothing new to oil-rich TT, for it was only a few years ago that the Government made substantial strides regarding property tax, a scheme of taxation that was always in contemplation by the masses.

Talk of inheritance tax and the implementation of same only surfaces at certain times in the sphere of governance and often loses traction with time. For us, the issue of inheritance tax, at least for the moment, is a short-term conversation. However, in other parts of the world, death tax, as it is often called, is very much a live issue.

Inheritance tax is nothing new to the land of the living, for the genesis of taxation of property transferred at death can be traced back to ancient Egypt as early as 700 BC.

In his book An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith wrote that nearly 2,000 years ago, Roman Emperor Caesar Augustus imposed the
Vicesina Hereditatium (which translates to "twentieth penny of inheritances"), a tax on successions and legacies on the wealthiest Roman estates upon the death of their patriarch. However, this Roman tax scheme wasn't without exemptions, similar to the modern-day approach.

Exemptions were allowed for close family members and charity to the poor, but this tax scheme's primary purpose was to collect much-needed revenue. While inheritance tax can be traced to the dawn of civilisation, it was met with opposition even then.

Scholars observed that the consensus view of the masses at that time despised the use of this tax scheme, for many believed it cruelly took advantage of grieving families. In the 18th century, English jurist William Blackstone argued that a person's claim to wealth ended when life ended, and the state should regulate any inheritance. This did not find favour on the American front as Adam Smith favoured the rights of the individual and free market for the ultimate good of society.

Nonetheless, despite harsh criticism, inheritance tax lives on and is assessed using several variables and thresholds. By definition, an inheritance tax is a tax on the estate (the property, money and possessions) of someone who's died. It can also include gifts made during the deceased lifetime that may be taxed upon the donor's death.

In the UK, the inheritance tax rate is 40 per cent, which is only charged on the part of the estate that goes beyond the threshold. The rules of taxation in the UK follow that no inheritance tax would be charged where the value of your estate is below the £325,000 threshold (which is often referred to as the nil band rate) or if you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

Only when the estate surpasses the threshold would the tax be payable on the excess. The scheme also allows for a reduced tax to be paid if the deceased left ten per cent or more of the "net value" to charity by way of a will.

In the US, inheritance tax isn't as common as in other parts of the world, for in practice it is only applicable in six states as of 2023, according to a financial website. Taxation greatly depends on the state where the deceased lived or owned property, the value of the inheritance, and the beneficiary's relationship to the deceased.

This taxation scheme is controversial worldwide, but some supporters believe that a wider societal benefit can be derived if considered from an equality of opportunity approach.

Broadway, Chamberlain and Emmerson (2010) wrote that inheritances and gifts can create a divide between the opportunities that people face. Wealth transfers might give recipients a head start that is not linked to their efforts and reduce equality of opportunity. In many ways, inheritance tax attempts to level the playing field, increase equality of opportunity, and improve social mobility.

Another argument follows that inheritance tax and gift taxation can strengthen horizontal and vertical equity. The horizontal equity principle follows that people receiving the same income or assets should be taxed similarly. By this logic, there should not be a difference in people's tax burden in equal circumstances depending on whether they receive transfers from others in the form of earnings or gifts and inheritances.

The vertical equity principle suggests that taxpayers with a greater ability to pay tax should pay relatively more tax. Taxing wealth transfers through inheritance tax ensures that those who receive more wealth pay more tax. And, of course, those who greatly detest this taxation scheme believe that the system penalises one for being successful by punishing recipients for the donor's hard work and admonishing the donor's sacrifices.

Also, a strong argument can be made on the double tax point. Property garners several financial outgoings throughout one's lifetime, stamp duty and property tax, to name a few. And when property is transferred to another by a death gift, inheritance tax triggers more financial outpouring on the property already subjected to taxes.

Few things in life are certain, but death and taxes are. And when you marry the two, death tax is the resulting force. Take it or leave it; one thing's for sure, it will always be a sore point of contention.