On 11 May 2021 the OECD published a tax policy study entitled Inheritance Tax in OECD Countries. The OECD study notes that inheritance taxation can be used as a measure to address inequalities and this is especially importance in the present situation where there is high wealth inequality combined with pressure on public finances following the crisis caused by the pandemic.
The report contains a comparative study of inheritance, estate and gift taxes in the OECD countries and looks at the potential of these taxes for revenue raising, creating more equality and making tax systems more effective.
The report emphasises the concentration of wealth within the OECD countries and shows that on average the inheritances and gifts reported by the highest 20% of households in terms of wealth are around 50 times higher than the inheritances and gifts reported by the lowest 20% of households in terms of wealth.
This inequality can be addressed by inheritance taxes if they apply mainly to relatively high levels of wealth transfer. This can increase equality of opportunity within a country. Inheritance taxes are a useful tool because they are easier to assess and collect than alternative forms of wealth tax.
Of the OECD countries, 24 currently levy inheritance or estate taxes but these generally do not raise much revenue. On average 0.5% of total tax revenues are sourced from inheritance, estate and gift taxes in the OECD countries that have introduced these taxes.
The reason why very little tax is collected from the inheritance taxes is at there are large tax exemptions and other methods of tax relief, which mainly benefit the wealthiest households and reduce the efficiency and progressive nature of the taxes. There are generally high thresholds of wealth before the taxes apply, and relief is given for transfers of particular types of asset such as business and farm assets, pension assets or life insurance policies. In many cases the inheritance taxes can be avoided to some extent by making lifetime gifts, which generally receive more favourable tax treatment.
The report notes that although there is a strong case for continuing to use inheritance taxes they will need to be better designed if they are to effectively achieve their goals. The design of the taxes differs greatly across the OECD countries in terms of the level of tax-free transfers permitted and the level of tax rates.
The OECD report proposes some reform options to increase revenue from the taxes as well as improving efficiency and fairness. The precise nature of any reforms would depend on the situation in a particular country, but an inheritance tax could be levied on the basis of the value of assets received by beneficiaries, with an exemption where the inheritance is of low value. A tax could be levied on a lifetime basis, looking at total wealth received by beneficiaries over a lifetime through gifts and inheritances. This would reduce opportunities for avoidance although it would give rise to greater compliance costs. Other priorities for better design are to reduce regressive tax reliefs; to better align the treatment of gifts and inheritances; and to reduce opportunities for avoidance and evasion.