By Daniel Archibald | CFA
In the first few seasons of the award winning "Downton Abbey", the concept of inheritance tax was raised a number of times. The risk to a family's wealth from having to pay tax on transferring wealth to the children (even for a family as wealthy as the Granthams), was considerable enough to form an underlying plot line throughout the drama.
In 1979, Australia did away with death duties, meaning that assets inherited since have been able to pass to most beneficiaries without the need for taxes. There are still occasions where tax may be levied (e.g. capital gains tax on transfer of assets to charities; superannuation death benefits paid to non-dependents), but by and large, Australians can feel safe in the knowledge that their wealth will not get diluted upon death (or gifting).
There are a number of different ways transfers of wealth might be taxed:
- Inheritance tax - usually a flat % of the amount above a tax-free level, inherited upon death, payable by the beneficiary
- Gift tax - usually a flat % of the amount above a tax-free level, gifted by a living person, payable by the beneficiary
- Transfer duties - usually a flat % of the value of the asset when ownership is transferred
In Australia, there are no inheritance and gift taxes, but there may be stamp duty on certain types of assets (particularly property) levied by state governments. In other jurisdictions throughout the world, where there is an inheritance tax, there is usually also a gift tax (in order to prevent families from gifting wealth before death). In the US, these taxes can range from 0% to 40%, which is similar to the rates of transfer taxes in the UK.
Back to season 4 of Downton Abbey (spoiler alert): In the early episodes of the season, the family was struggling with the death of one of the wealth holders and was hit with a large tax bill. When it was discovered that the estate was to pass entirely to the surviving wife, instead of going to the young son, the family patriarch was concerned as this now meant that the estate would be taxed twice in getting the funds to the second generation. For countries with estate taxes, skipping generations can be an important way of minimising wealth leakages to taxes over time.
Another way in which family wealth can be protected is through utilising long-term trust structures or company structures. Passing wealth through to a holding entity once can help avoid tax costs upon the death of family members.
For those with assets overseas, or those considering moving to another tax jurisdiction, how wealth may be taxed, either because of income earned or the transfer of ownership, is important to understand. And as the world gets smaller, the likelihood of being affected by other tax regimes will only grow.
"Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes."
Benjamin Franklin 1789.