Inheritance Tax rates in G7 and EU countries ten times higher than emerging economies...

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The average inheritance tax rates in G7 and EU countries are more than ten times higher than those in emerging economies*, according to a new study by UHY, the international accountancy network.

 

Individuals in G7 countries pay an average of 16.8% (503,321 USD) and those in EU countries pay an average of 10.9% (325,775 USD) in Inheritance Tax (IHT) when passing on 3million USD in cash to their beneficiaries**. In comparison, individuals in emerging economies pay an average of 0.9% (28,429 USD) when passing on 3million USD in cash.

 

The disparity is also reflected in lower value bands. EU individuals pay on average 3.8% (13,320 USD) in IHT on 350,000 USD in cash versus an average of 0.7% (2,326 USD) in emerging economies. Similarly, average IHT rates in the EU on 750,000 USD are 5.0% (37,358 USD), compared to 0.7% (5,604 USD) in emerging economies.

 

UHY says IHT has been labelled an unfair ‘death tax’ and some commentators have called for it to be abolished. Families in economies with high IHT rates can be hit with considerable tax bills at a time when they may be dealing with a bereavement.

 

IHT is also said to disincentivise entrepreneurs from building their wealth on the basis that having faced high-income tax bills throughout their careers, their dependents then face high IHT charges on any residual wealth.

 

Dennis Petri, Chairman of UHY International and Partner at UHY Advisors, MI, US: “There is a stark difference in IHT between slower growth economies and faster growth economies. The question is how much taxes on inheritance really discourage wealth creation.”

 

Some Governments of EU countries have faced pressure to reduce IHT rates to ease the burden on taxpayers. For example, IHT rates paid in Denmark and Belgium are consistently high across all the wealth bands covered in the study (see tables below).

 

Denmark is renowned for having a broad welfare system which is funded in part by revenue generated from high tax levels, including income tax, property tax and IHT. However, criticism of high IHT rates in Denmark has grown in recent years.

 

High IHT rates in Belgium have pushed some high earners to use loopholes in the country’s tax system to avoid paying steep IHT bills. Whilst the Belgian Government introduced reforms in 2018 to help simplify the IHT system and to try to close loopholes, it has not reduced the tax rate.

 

The UK has also been criticised for making no substantial changes to the IHT system since the 1980s and for freezing the IHT threshold at 418,541 USD over a decade. This has served to increase the number of people being caught by the tax as incomes rise – HMRC collected a record 6.7 billion USD from IHT receipts in 2018/19***.

 

However, UHY adds that IHT has been used in some countries to help tackle wealth inequality. A recent study suggests**** that countries may need to go further than taxing incomes to help redistribute wealth to younger generations.

 

No inheritance tax in some emerging economies

Emerging economies that do not impose IHT include China, India and Russia. This compares to individuals in Japan who pay 38.5% (1.2million USD) in IHT when passing on 3 million USD of cash – the highest level in the study.

 

Dennis Petri adds: “Many emerging economies are especially keen to encourage wealth creation – levying very low or no IHT is seen as an important way to help achieve that.”

 

“Entrepreneurs may be incentivised to earn more in these countries as they can pass on their wealth to the next generation without the taxman interfering.”

 

“In emerging economies, inheritance tax can play a vital role in helping fund the early stages of new businesses, especially in countries where there are less traditional forms of finance available.”

 

Individuals in France pay the second highest rate of IHT at 34.3% (1million USD), with individuals in the UK paying the third highest rate at 29% (869,674 USD).

 

Dennis Petri adds: “This study sheds light on the heavy tax burden that is shouldered by wealthy individuals living in some economies. There is the risk that an overbearing IHT regime could drive wealthy, mobile individuals to move to countries with more lenient regimes.”

 

“Despite many calling for ‘death taxes’ to be radically reformed or abolished altogether, Governments are often reliant on the substantial income streams generated by IHT receipts. This could suggest that IHT looks set to stay for the foreseeable future.”

 

Emerging economies resist introducing IHT to attract investment

Many emerging economies have resisted introducing IHT in an effort to attract investment. These countries include Croatia, Malaysia, Uruguay and Mexico.

 

Wealthy individuals may be attracted to set up businesses in countries with no IHT. This could support job creation, business investment and provide a source of vital economic growth.

 

*Emerging economies include: Argentina, Brazil, India, Malaysia, Mexico, Poland, Russia, China, Croatia, Romania, Uruguay.

**Source: UHY studies tax data in 28 countries across its international network. The study compared the ‘inheritance tax’ paid on 3 million USD of cash. The calculations are based on the deceased having two heirs receiving an equal share – both adult, non-dependent children. Both the deceased and heir are tax residents in the country

***Source: HMRC

****Source: OECD

***** US charges no Federal Inheritance Tax on these sums. In those few states that do charge Inheritance Tax that tax does not apply if the individual relocates to one of the larger number of states that charge no tax eg Arizona, California, Florida, Texas etc.

 

All 28 countries ranked by the amount and the percentage of IHT individuals pay on handing down 350,000 USD of cash – G7 and EU countries impose highest IHT rates on cash

 

All 28 countries ranked by the amount and the percentage of IHT individuals pay on handing down 750,000 USD of cash – G7 and EU countries impose highest IHT rates on cash

 

All 28 countries ranked by the amount and the percentage of IHT individuals pay on handing down 3,000,000 USD of cash – G7 and EU countries impose highest IHT rates on cash

 

Notes for Editors

UHY press contact: Leigh Lyons on +44 20 7767 2624

Email: l.lyons@uhy.com

Nick Mattison or Alex Williams

Mattison Public Relations

+44 20 7645 3636

+44 779 320 7325

Email: alex.williams@mattison.co.uk

 

About UHY

Established in 1986 and based in London, UK, UHY is a leading network of independent audit, accounting, tax and consulting firms with offices in over 300 major business centres across 100 countries.

Our staff members, over 8,200 strong, are proud to be part of the 16th largest international accounting and consultancy network. Each member of UHY is a legally separate and independent firm. For further information on UHY please go to www.uhy.com.

UHY is a member of the Forum of Firms, an association of international networks of accounting firms. For additional information on the Forum of Firms, visit www.forumoffirms.org

As of January 3 2020, this press release has been revised to amend an incorrect figure for the European Union.

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Top earners in G7 pay over 60% more in income tax compared with those in BRIC countries...

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High earners on an income of 1.5million USD in G7 countries pay over 60% more in income tax than those in BRIC economies, according to new research by UHY International, the international accountancy network*.

For individuals earning 1.5 million USD per annum in the G7, they pay on average 719,751 USD in tax (47.9% effective tax rate) compared with 446,883 USD in tax (29.8% effective tax rate) in BRIC countries.

UHY says G7 countries risk losing out on substantial tax receipts if their tax regimes become uncompetitive for wealthy individuals and they look to relocate their businesses to lower-tax jurisdictions, taking jobs and economic growth with them.

G7 countries including France, Canada the US and UK, have all recently taken measures to reduce or withdraw top rate tax bands imposed following the financial crisis. In 2014 for example, France’s rate of 45.8% (on a $1.5m income), was substantially higher than the current rate of 40.0%. In 2014, the French government also decided to scrap the country’s 75% marginal rate on incomes above €1 million.

The new British Prime Minister, Boris Johnson, said during his campaign for Conservative party leader, that he would cut taxes for higher earners by raising the 40% income tax threshold from 50,000 GBP to 80,000 GBP.

Outside the G7 and BRIC countries, other emerging economies continue to offer some of the most generous tax regimes to high earners**. In Nigeria and Pakistan for instance, those earning 1.5million USD, would pay just 19% and 25% income tax respectively.

Out of all the countries studied, Russia had the lowest income tax rate, where all tax payers, including high earners, pay just 13% income tax.

Denmark taxes individuals earning 1.5 million USD, over half of their income – 53.2% in total – ranking the highest among the 30 countries studied, followed by Japan, The Netherlands, Canada and Ireland.

Denmark’s high taxes are used to pay for the Danish welfare system, where higher education and healthcare are free for all citizens. The Danish welfare model also provides young families with long periods of parental leave (up to 52 weeks) and inexpensive childcare facilities.

UHY says another reason why the income tax burden on employees in Denmark is high is because the vast majority of social security contributions are borne by the employee rather than the employer. In other countries, such as Sweden and France, more of the social security costs are shifted onto the employer.

Lower income taxpayers

For lower income taxpayers earning 25,000 USD, there is almost no difference between the amount of tax paid among the G7 and BRIC countries. A taxpayer earning 25,000 USD in a G7 country would pay 16.5% income tax on earnings, compared to 16.4% for a worker in a BRIC economy.

Emerging economies average a tax rate of 23.5% on a 25,000 USD income, far in excess of the 16.5% average among the G7 or the 19.2% average in Europe**. This reflects the lower average cost of living in BRIC economies compared with in the G7.

There are signs, however, that some emerging economies are moving towards lower income tax rates for lower incomes as they grow. In China for example the effective rate for individuals earning 25,000 USD has been cut substantially over the last five years – when UHY last studied taxation of income, the tax rate for an individual earning 25,000 USD stood at 10.8% compared with just 5.1% today.

Rick David, Chairman of UHY International, says: “Taxes on the top earners residing in G7 economies have eased off slightly since the changes imposed after the financial crisis.”

“Many Western European governments are still concerned though that their jurisdictions may become uncompetitive given the low tax rates in other developing jurisdictions so a number of countries have now taken steps to reduce their top rate of tax.”

“However as developing countries mature and their middle classes expand, governments may decide to increase their marginal rates of tax on higher earners to meet greater demand for public services. This is beginning to happen in Asian countries such as India and China which have gradually been taxing higher incomes more and lower incomes less.”

“Over time, as the population of developing countries becomes wealthier, this tax disparity between the G7 and BRIC economies could reduce.”

*UHY studied tax data in 30 countries across its international network. The study captured the ‘take home pay’ for low (25,000 USD), middle (250,000 USD) and high income workers (1,500,000 USD), taking into account personal taxes and social security contributions.  The calculations are based on a single, unmarried taxpayer with no children.

**Emerging economies studied included Russia, China, Romania, Zambia, Uruguay, India, Vietnam, The Philippines, Poland, Argentina, Pakistan and Nigeria

Ranked by amount of tax to the government in percentage

For lower income taxpayers earning US$25,000, there is almost no difference between the amount of tax paid among the G7 and BRIC country averages

*UHY studied tax data in 30 countries across its international network. The study captured the ‘take home pay’ for low (25,000 USD), middle (250,000 USD) and high income workers (1,500,000 USD), taking into account personal taxes and social security contributions.  The calculations are based on a single, unmarried taxpayer with no children.

Notes for Editors

UHY global press contact: Dominique Maeremans on +44 20 7767 2621

Email: d.maeremans@uhy.com – www.uhy.com

Nick Mattison or Alex Williams

Mattison Public Relations

+44 20 7645 3636, +44 779 320 7325 or email: alex.williams@mattison.co.uk

About UHY

Established in 1986 and based in London, UK, UHY is a leading network of independent audit, accounting, tax and consulting firms with offices in over 300 major business centres across 100 countries.

Our staff members, over 8,200 strong, are proud to be part of the 16th largest international accounting and consultancy network. Each member of UHY is a legally separate and independent firm. For further information on UHY please go to www.uhy.com.

UHY is a member of the Forum of Firms, an association of international networks of accounting firms. For additional information on the Forum of Firms, visit www.forumoffirms.org