What is Inheritance Tax?
An Inheritance Tax is a tax that is levied on those who are bequeathed or receive assets from the estate of a deceased person.
1. A levy of assets inherited from a deceased person is known as Inheritance tax.
2. Estate tax and Inheritance tax are different. The value levied estate tax comes out of the decedent’s estate and inheritance tax is levied on the inheritance value of the beneficiary and he pays for it.
3. The question of who will pay the inheritance tax depends on the amount of inheritance as well as the relationship with the deceased. Lower values and closer relatives are less likely to pay tax.
Methods of Inheritance
1. Wills of Succession: This method is primarily an old and traditional way of inheritance. It is a type of document through which a deceased person rightfully pre declares a lawful owner of his/her assets.
2. Inheritance by nomination: In this type, a person can assign a nominee of his/her own choice. This nominee becomes the lawful owner of the assets and has right over benefits if generated from it.
3. Inheritance by joint ownership: If an asset is in joint ownership that is two or more people, then the survivor(s) can get to manage the asset post the death of the other owner(s).
Estate duty and its abolition:
In India, we do not have any substantial Estate duty or Inheritance tax however it is important to note that back in 1953 the Estate duty was introduced which was then abolished by the Rajiv Gandhi Government in the year 1958. Talking about Estate duty, it was nothing but a tax levied on the total value of the property that was held by an individual and calculated at the time of death. Only when the property was passed to the successors it was payable. From 1957 – 2015 India even had a wealth tax which was abolished citing disproportionately high administration and compliance cost that was needed for implementation and collection of wealth tax. In addition, verification of personal assets held by Indian citizens was practically impossible.
Though the intentions of the Inheritance tax were noble the then, finance minister V.P Singh had an opinion about its failure. According to him, the Inheritance tax failed to bring about an equilibrium in the society as well as reduce the wealth gap. Inheritance tax and Estate tax duty was levied from 1953 to 1985 which was then abolished due to high costs and meager tax collection, as well as the inefficiencies in the implementation.
Taxation on inherited assets:
According to the Income Tax Act of, 1961, no tax is levied on any inherited assets whether movable or immovable. However, tax is levied if the new owner decided to sell the property. The new owner is not liable to pay any tax in case of movable assets such as mutual funds, gold, shares, etc, however, if he/she decides to sell these assets then tax will be applicable.
In 2014 it was expressed by the Finance Minister of the State that he was inclined towards bringing back the inheritance tax in some form. Further recent reports in 2017 had suggested that the government also wanted to bring back the inheritance tax. According to reports, the top 10 percent earned 56 percent of the country’s income whereas the bottom percent earned only 3.5 percent, 80.7 percent of the wealth was owned by the richest 10 percent Indians. An important contribution of Inheritance tax could be in raising revenues, addressing the inequalities, and improvising the efficiency in the countries particularly in the context of constant high wealth inequality and transfer of unevenly distributed wealth. Currently, due to the pandemic, our country is under great pressure to raise additional revenues and tackle inequalities. The government will have to be very vigilant while framing laws as they would have to ensure that the main purpose of the act is fulfilled. An analysis needs to be done as to how inheritance tax helps the major economic countries and, on that basis, the concession rates, as well as slab rates, should be decided. There should be no negative impact on people due to this act and it should act like a boon and not a burden on people inheriting the wealth.
Inheritance Act in the Light of COVID 19
Due to the pandemic spread across and the world as well as national lockdown, there has been a 10-measure proposal by the Income Tax Department of India (ITD) to help boost the tax revenue.
For this initiative, the officials have suggested that there should be a reintroduction of inheritance tax with rates such as 55% to help widen the tax base, enhance revenue and reduce the concentration of wealth. They are very affirmative about the fact that the taxation system will also help in the reduction of tax rates in general.
The imposition of an inheritance tax which was earlier known as estate duty is an ideal way to contribute to the wealth of our country as well as reducing inequalities. The mere imposition of tax though is not the only solution but should be accompanied by commensurate gift tax because the purpose of inheritance tax would be defeated if wealth can be gifted away after paying little or no tax on it. The inequalities of wealth have grown in India over recent decades for example: if a rich individual dies and his/her successors don’t pay any taxes on wealth bequeathed on them.
If the inheritance tax is not combined with a gift tax a lot of people would start to gift their wealth to their children even before they die. As a part of the neo-liberal policies, the estate tax was abolished and it was felt that the wealthy should not be taxed however eventually it so happened that income tax was reduced and multiple taxes were abolished.
Inheritance act can have adverse effects as well:
In the middle of the wealth ladder are the trusts where the rich transfer their wealth. They would be the most harassed through this. Instead of looking for ways to reduce inequalities in India, the focus should be shifted to increasing the wealth and aiding the creation. It shouldn’t happen that instead of creating wealth we are redistributing poverty because such taxes take us back.
There is a lack of public social security net in our country. It is not a good idea to have taxing inheritance money which relies on family money because even the provident fund money cannot take care of retirement needs at times.
Inheritance tax in other countries
A lot of countries like the USA, UK, Netherlands, Spain, Belgium practice this form of taxation. There is a maximum rate of 80% levied on inheritance tax by these countries. These assets are passed to the legal heirs after the owner’s demise but these facts are backed with strong social security provided to the citizens by their country.
Inheritance Tax in the USA
There is an estate tax that applies to the value of the estate by any individual in any part of the world which upon his death is transferred. Hence a USA citizen is liable for tax irrespective of his estate being within or outside the USA.
With the rate of an estate being forty percent, in 2017 the gift and estate tax exemption were 5.49 dollars per person. For married couples filing a joint tax return, the exemption gets doubled to 10.98 million dollars. There is even a state-level estate tax for several states which is over and above the federal limit.
Inheritance Tax in the United Kingdom
The determination of tax of an individual in the UK is by their domicile status or residential status. The deceased who was domiciled in the UK can have tax levied on his/her worldwide estate. There is a general regime of estate and gift tax called inheritance tax. When an individual dies there is a transfer of the whole state or a transfer of gifts made during the lifetime of an individual.
There is a standard rate of inheritance tax which is set at 40% however having an exemption of three hundred and twenty-five thousand pounds which is increased to four hundred twenty-five thousand pounds if the estate is given to children or grandchildren.
To sum it up, the Inheritance act should focus on bridging the inequalities in society but it shouldn’t be too harsh that people start moving their assets abroad. There should be an exemption limit and above which a certain percentage of tax should be paid. The inheritance act will indeed play an important role in reducing wealth inequality but it cannot be the only measure. The government should come up with comprehensive measures for the personal gains of individuals that will work simultaneously with the Inheritance act to combat wealth inequalities.
1. Section 2(15) of the Estate Duty Act, 1953.
2. Section 8 of the Estate Duty Act, 1953.
3. Section 9(1) of the Estate Duty Act, 1953.
4. Section 21(1) (a) and (b) of the Estate Duty Act, 1953.
5. Section 56(2)(v)(c) of the Income Tax Act, 1961.
Author: Vanshika Jain | 5th year Law student | DES Shri Navalmal Firodia Law college.