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INHERITANCE TAX LAW: A FAIR REDISTRIBUTION OR ECONOMIC BURDEN?
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INHERITANCE TAX LAW: A FAIR
REDISTRIBUTION OR ECONOMIC BURDEN?
AUTHORED BY - ANANYA BHATTI
Sam Pitroda, an Indian
Telecommunications Engineer and a senior Indian Overseas Congress leader,
recently sparked a new debate among this country's citizens regarding the need
for an Inheritance Tax Law while seeing the present state of the country. Mr
Pitroda in a recent interview given to a major Indian News Organization said
while explaining the concept of Inheritance tax “If one has $100 million worth
of wealth and when he dies he can only transfer about 45 per cent to his
children, 55 per cent is grabbed by the Government. That’s an interesting law. (Pitroda,
2024) [1]”
Sam has suddenly sparked the
conversation regarding the Inheritance Tax Law.
So what on earth is the Inheritance Tax Law, what other countries have
Inheritance Tax Law, does India in the past have this kind of similar law, what
are its advantages and disadvantages, and in the present scenario does India
need this kind of law for the upliftment of the not-so-privileged sections of
the society. These are the kinds of questions that will be answered below.
Introduction
The legal Framework used in governing
the taxation on assets and properties transferred from a deceased person to
his/her heirs is known as Inheritance Tax Law. Estate Tax, Death Duty, etc are
some other words that are used to call Inheritance Tax by various other legal Jurisdictions
around the world. This law aims to generate other income sources for the
government by taxing the assets and properties of the person who has died.
Each Jurisdiction around the world
has its threshold, exemptions and rates regarding the Inheritance Tax Law.
There is a multifaceted rationale behind the use of Inheritance Tax by
Governments around the world. Sometimes it serves as an additional income for
the government. In contrast, at the other time, it serves as a tool to
redistribute wealth towards the underprivileged class of the people in the
country. Additionally, it also discourages the concentration of wealth within a
smaller group of society.
However, it is to be noted that
Inheritance Tax Laws are very complex and have significant implications on the
individual as well as society. Poor planning of these laws can have serious consequences
for the people of the country. The use of trusts is also used by the people to
get rid of Inheritance Tax Laws, mitigate tax liabilities and ensure efficient
transfer of assets to the intended beneficiaries.
Overall, Inheritance Tax Laws play a
very crucial role in the society in which it is implied.
Countries
That Have Inheritance Tax Law
It is to be noted that Inheritance
Tax Laws exist in various countries, though specifics may vary because of different
countries' different jurisdictions. Multiple countries in the world have
Inheritance Tax Laws but mostly those are Western and First World Countries,
like the United States of America, the United Kingdom of Great Britain and
Northern Ireland, France, etc. just to name a few. But why does most of the Western world have
Inheritance Tax Laws? It is because of
cultural and historical reasons. Most of the countries in the Western world
have a concept of progressive taxation where those who have higher incomes have
a larger share in taxes. These countries also have means for equal distribution
of wealth while ensuring social equity. Moreover, Western Countries have a
well-established legal system and administrative system that can be used to
enforce and implement inheritance tax laws. These countries also have higher
levels of economic development and a robust welfare system that can be used to implement
these kinds of policies.
1) United States of America
The United States of
America is the first and most prominent example of the country when we say
about Inheritance Tax Laws. The USA’s inheritance tax laws have two facets.
Firstly, there is the Federal Estate Tax, which is the tax that is imposed on
the estate of the deceased person. It is imposed on the estate’s total value at
the time of death, minus certain deductions and exceptions. It is also to be
noted that there is a certain threshold that is set by the USA, below which the
Federal Estate Tax is exempted. As of 2024, the threshold for Federal Estate Tax
is 13.61 Million Dollars per individual.[2] [3]This
means estates below this threshold are not subject to Federal Estate Tax. For
estates that exceed the threshold limit, then the Federal Estate Tax is imposed
at progressive tax rates. The tax ranges from 18% to 40% depending on the value
of the tax. The higher the values of the estates, the higher the federal estate
tax. The highest threshold applies to the type of estate that exceeds all the exemption
thresholds. Federal Estate Tax also allows for portability between the spouses.
This means that if one spouse dies without using the full exemption amount then
the unused portion can be transferred to the other spouse effectively doubling
the exemption rate. Other than the Federal Estate Tax, each state in the United
States also has its own State Estate Tax that has different thresholds, rates
and rules compared to the Federal Estate Tax.
2) United Kingdom of Great Britain and
Northern Ireland
There is also a provision
of inheritance tax law in the United Kingdom. The Inheritance Tax Law in the United
Kingdom of Great Britain and Northern Ireland has three parts through which the
Government decides how much tax is to be levied on the deceased individual’s
estate. The first part is the Nil Rate Band ( NRB ). The NRB is up to which the
Government doesn’t hold Inheritance Tax liability. Each person has their own
Nil Rate Band as per the United Kingdom’s law. The Nil Rate Band for 2024-25 is
325,000 Pound Sterling[4]. After
NRB there is Residence Nil Rate Band. The Residence Nil Rate Band is the
additional allowance that applies when the main residence is given to the
direct descendant of the deceased. The RNRB gradually increased from 100,000
Pound sterling in 2016-17 and now stands at 175,000 Pound sterling as of
2020-21. These above rates are not fixed, these are constantly changing as per
the needs of the UK’s Government and changes in the UK’s society. The NRB and
RNRB are also known as thresholds in the UK’s Inheritance Tax Law above which
the taxes are enforced on the citizens. The tax rate in Inheritance Tax Law in the
UK is 40% on the value of the estate above the Nil Rate Band and Residence Nil
Rate Band.
Under the United
Kingdom’s Inheritance Tax Law, there are some exemptions and reliefs given to
the citizens. These include Spouse or Civil Partner exemption which means
transfers between civil partners and spouses are mostly exempted from
Inheritance Tax regardless of the amount. Gifts or estates registered to
charities whether made during one's lifetime or in the will are exempted from
Inheritance Tax. Citizens can give away gifts that amount to 3000 pounds
sterling in a year without being added to the Inheritance Tax. Also, small
gifts up to 250 pounds sterling per year without being added to the Inheritance
Tax.[5] It
is also stated in the law that gifts made more than seven years before the
death of the donor are also generally exempted from the Inheritance Tax, these
are also called Potentially Exempt Transfers or PTs. The exemptions also
include Business Property Relief or BPR which can apply to business assets and can
allow them to pass tax free from the inheritance tax or with reduced tax. There
is also Agriculture Property Relief or APR in exemptions and relief in Inheritance
Law. Similar to BPR, APR applies on agricultural property allowing it to pass
free from tax or reduced tax from Inheritance Tax Law. But gifts made into
certain types of trusts or gits above the annual exemption are subjected to
Inheritance Tax. The executor or administrator of the deceased person is
responsible for calculating and paying the dues of Inheritance Tax. This
includes valuing the estate’s assets, applying any exemptions or reliefs and
completing necessary forms of Revenue and Customs.
3) France
Inheritance Tax in France
is known as “droits de succession” or “taxe sur le successions”[6].
Like other countries, France also has exemption thresholds, tax rates and
exemptions and reliefs. In the exemption threshold, the amount exempt from the
Inheritance Tax depends upon the relationship between the deceased and the
beneficiary. While the spouses are generally exempted from the tax, other beneficiaries
are included in the inheritance tax and it generally depends upon the region of
France. The Inheritance tax rates in France are progressive which means that it
depends upon the value of the inherited assets and the region of France. The
tax rates can range from 5% to 45%.
Like the United Kingdom, France also
has some exemptions and reliefs. The transfers to the spouses and civil
partners are exempted from Inheritance Tax. The transfers between the children
and descendants are subject to lower inheritance tax. Small gifts given by the donor
to the beneficiaries before the death of the donor are also exempted from
taxation. Life Insurance policies can also provide tax-efficient inheritances
subject to conditions and limits. The donations made during the lifetime of the
deceased can also be subject to inheritance tax but the rate depends upon the
nature of the gifts and the relationships between the donor and beneficiaries.
The administration of the
Inheritance Tax in France is in the following manner. Firstly, the
beneficiaries are required to declare the Inheritance Tax within a specified
timeframe after the death of the deceased. Secondly, the estate value is
assessed after taking note of both assets and liabilities. Thirdly, the tax
authorities calculate the inheritance tax after taking into account thresholds,
applicable rates of tax and exemptions. Lastly, the beneficiaries must pay the
tax within a specified period.
Inheritance Tax in India
In the past, India also has an Inheritance
Tax Law. It was by the name of Estate Duty. The whole act was the Estate Duty
Act, of 1953. This law was formed in 1953 during the tenure of our then Prime
Minister Pandit Jawaharlal Nehru. This estate duty was abolished in 1985 during
the time of the then Prime Minister Rajiv Gandhi.
Estate Duty applied to both moveable
and immovable property situated in India and can also applied to certain
properties outside India if the deceased was a resident of India. The estate
duty is paid by the executor of the deceased’s estate before the distribution
of the estate to his/her beneficiaries. The estate value was based on fair
market value, that is the value of the estate at the time of the person’s
death. It was noted that the estate included all the assets, possessions,
interests, properties and rights that were entitled to the deceased at the time
of his/her death. The tax rates in the Estate Duty of 1953 were progressive
which means that the higher the cost of the estate, the higher the tax is
levied on the estate, which can go up to 85%. The rates in the Estate Tax of
1953 were structured in slabs, that were similar to the present-day Income Tax
in India[7].
There were also various deductions
and exemptions present that were reasonable for example funeral expenses, debt
present with the person at the time of his/her death and encumbrances as well
as specific allowances in the agricultural land and family-owned business held
closely. Certain deductions and exemptions were provided for the agricultural
land under the then estate tax. The main intent of this provision was to
protect the farmers and certain agricultural communities so that they were not
stripped of their livelihood. Certain deductions were also provided and allowed
for the properties inherited by the close family members as this was due to
reduce the tax burden on the family members who inherited the property. Lastly,
the properties given to reputable charitable organisations were also exempted
from the Estate Tax.
The administration and execution of
the Estate Duty was done with the appointment of the Estate Duty Officer. The
Government appointed the Estate Duty Officer to assess the value of the estate,
determine the tax payable and ensure the compliance of law by all the people in
the country. The Executors of the estate of the deceased are required to file a
statement to the Government analysing all the value of the estate and its
liabilities. The Estate Duty Officer was then required to assess and confirm
the tax payable. But if any dispute arises regarding the valuation of the
estate then there were provisions to appeal the same to the higher authorities
including tribunals and courts.
The main intent of Estate Duty was to
generate additional income for the Government. It used to create significant
revenue for the state. But the problem was that the actual collection for the
Estate Duty was much less than what was anticipated and expected. This was
because of widespread evasion and avoidance by the people. The Estate Duty of
1953 also faced criticism because though this law was made for the
redistribution of wealth, it was complex and discouraged people from saving and
investing in the market in India because people believed that in the end a
certain chunk of their investment and savings will be taken away by the
government. Moreover, this process was very tiring and cumbersome for both the
taxpayers and the administration. Finding the value of the estates by the
executors and then reviewed by the Estate Duty Officer posed a significant
challenge to the citizens as well as the Government.
In 1985, the Estate Duty in India was
abolished. It was a very significant change in the Inheritance Tax Law in the
country. It was abolished because the estate duty did not generate significant
revenue for the Government as people were using loopholes to not pay that
estate duty. Moreover, due to its
complexities, it gave a significant challenge to the administration as well as
to the citizens. Lastly, as it was discouraging the citizens from saving and
investing, to encourage the same it was abolished. Since the abolishment of
estate duty simplified the tax regime of India. Since the abolition of estate duty,
there has been no direct inheritance tax law in India (Gift Tax was also
abolished in 1988).
Advantages And Disadvantages Of Inheritance
Tax Law
The Inheritance Tax Law has both pros
and cons. Each country analyses these pros and cons and then decides whether to
implement the inheritance tax laws in their respective countries.
Inheritance Tax Laws help the government
in providing significant revenue generation for the Government. The government
can further use this generated money for social welfare like infrastructure,
education, healthcare, and social welfare programs. Moreover, the Inheritance
Tax is also used by Governments worldwide to reduce budget deficits and manage
the national debt levels for effective management. Wealth redistribution is
also one of the advantages of Inheritance Tax Law. This law prevents the
concentration of wealth within the small segments of society. It prevents the
rich from being rich and helps the poor to gain a certain stand in society, promoting
economic equality and equitable distribution of wealth within the society. Taxing
large inheritance also paves the way for the social mobility of poor people. Moreover,
in most countries giving some part of the inheritance to the charitable
organization reduces the tax that will be levied as the inheritance tax law. To
reduce the tax on the inherited estate, wealthy individuals of the society most
of the time increase their charitable institutions. Even though the reason is
quite selfish, but inheritance tax law increases charitable donations to
various non-profits and social causes. Also, inheritance tax encourages the use
of assets rather than saving or hoarding wealth. Due to this, the heirs of the
wealth may be motivated to spend the wealth and invest the inheritance effectively
which will further lead to effective investment in the country. Lastly, it
encourages individuals to have more active financial planning which leads to a
very efficient and productive use of resources during the inheritant's
lifetime.[8]
With advantages, there are also
disadvantages of the Inheritance Tax Law. The first disadvantage is that it is
a huge administrative burden. As we know, Inheritance Tax Law is very complex
for the government and citizens as the whole process of valuing assets and calculating
the tax is very complex and expensive, requiring significant administrative
resources and professional assistance. The inheritance tax law also requires
lawyers for the inheritance which can be quite expensive. Also, a high
inheritance tax discourages individuals from saving and investing because they
know that a huge chunk of money will be taken by the Government so there is no
use for savings and investments. The businesses owned by the families may also
struggle to survive after the owner's death because the inheritance will have
to sell their assets to pay the inheritance tax, which is not good for the
economy and citizens' general social conscience. It can also be possible that
during the owner's lifetime, the business is subjected to other taxes like
capital tax or income tax, which in turn will lead to double taxation. Many
families will also have to liquidate their family assets to pay the inheritance
tax which can disrupt the family legacy and heritage. Moreover, to save the
inheritance tax, the people will use legal loopholes like offshore assets that
will help them save the tax and this is not good for generating revenue for the
Government. Lastly, it impacts the financial security and long-term planning
for the heirs.[9]
Should India have an Inheritance Tax
law now?
With the largest population in the
world, India also has 77.8 million taxpayers in 2022-23. India certainly had an
example with the Inheritance Tax law right after the years of independence by
the name of estate duty. We also know that it was scrapped in 1985 by our the
then Prime Minister Late Rajiv Gandhi. Even after so many years does India need
Inheritance Tax law? Does India need to tax the inheritances of these people to
increase the revenue and to support later that money for the less privileged
people of the country?
The answer that came forward after
the research on this topic is India should not have an Inheritance Tax Law. It
is because it will lead to many complex problems which will be difficult to
solve in the country. The social or economic considerations like discouragement
of investment and saving because people know that a certain amount of money
will be taken away by the government, or due to complexities of the law it will
become a huge administrative challenge for the same or a bad impact on the
middle class or small business enterprises such as double tax, etc. These
things can happen or did happen when the Inheritance Tax Law was first enforced
in India by the name of Estate Tax.
But what legal harm will the Inheritance
Tax cause if it is enforced in India? Firstly, it will increase the litigation
and legal disputes in the country. As if the country is currently not grappling
with a high number of cases. By, enforcing this tax will further increase the pile-up
number of cases in the country. Secondly, due to the complexities of this tax,
it will be very difficult to administer this and the same problem India had
before during the Estate Duty era. Thirdly, the practices of tax evasion will
increase in the country. Fourthly, in this globalised world, many people have
properties and assets all around the world and this tax will increase the cross-border
legal issues or battles in the name of assets. This will increase the
administrative burden and legal costs. This tax can also impact the stability
and legal certainty because people might get agitated because of this tax after
all government is taking their inheritance. Lastly, it has the potential for
some constitutional challenges because there might be people who may challenge
the constitutional validity of this act by stating that it violates some basic
principles of fairness enshrined in the Constitution.[10]
Conclusion
Inheritance Tax Law might be a
wonderful tool in the hands of the government to increase their revenue and
might have many advantages but in India, it most certainly becomes a failure
because its disadvantages outweigh its advantages. After legal and economic
development like in the West, maybe then we can think of this kind of tax before
it’s a bad bet.
[1] Interview with Sam Pitroda,
Chairman, Indian Overseas Congress, (ANI, 24 April 2024)
[2] https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
> accessed 7 May 2024
[6] https://www.economie.gouv.fr/particuliers/droits-succession-simulateur
> accessed 7 May 2024
[7] Dutta D, Gupta A, Malhotra H,
Shardul Amarchand and Mangaldas,2018, https://www.amsshardul.com/wp-content/uploads/2019/09/Report-GC-Estate-Duty-Act-March2018.pdf
> accessed 8 May 2024
[8] Daniel Halliday, Inheritance of
Wealth (2018)
[10] Daniel Halliday, Inheritance of
Wealth (2018)
Article Information
INHERITANCE TAX LAW: A FAIR REDISTRIBUTION OR ECONOMIC BURDEN?
Authors: ANANYA BHATTI
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/06/17
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
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