There’s never an easy time to talk about a family member passing away. Add money and inheritance to the conversation and most people would rather avoid the topic altogether. We understand. But we also know that planning ahead can save your family a lot of stress and unnecessary bills down the line. Especially when it comes to taxes, inheritance, and the distribution of assets.
Here are some things to keep in mind when thinking about the future.
Understanding the basics
Most developed countries have an inheritance (or estate) tax. That is, a direct tax on the total value of a deceased person's money and property that is paid out to the government before any distribution to beneficiaries. This tax can run as high as 55% in Japan, although the UK’s number isn’t too far behind at 40%.
Australia is an outlier, in that we don’t currently have any kind of inheritance tax. Whatever assets are passed down to family members, whether that’s property, cash, shares or otherwise, are exempt from any direct tax.
The caveat is that any change to a person’s financial position following on from an inheritance will be subject to the usual taxes, including interest earned, capital gains, etc. So, if you inherit a share portfolio, or a sum of cash that generates interest, you’ll be obliged to pay the relevant taxes on any earnings it generates.
Inheritance tax in Australia
Australia had an inheritance tax until 1979. But when Queensland Premier Sir Joh Bjelke-Petersen abolished all inheritance and gift taxes in the mid-70s to attract interstate migrants, the Federal Government responded by abolishing those same taxes nationally.
30 years later, the 2010 Henry Tax Review noted that the lack of inheritance tax had significant future implications. It found "large asset accumulations" ended in the hands of a relatively small number of people, and noted that inheritances were likely to rise from $22 billion in 2010 to $85 billion in 2030.
While there has been some discussion about the reintroduction of an inheritance tax, it’s not seen as a politically feasible policy from either of the major parties. Indeed, the Grattan Institute’s Budget Policy Director, Danielle Wood, described such a tax as "heinously unpopular" at the ballot box even while supporting the budgetary upside.
Inheritance tax around the world
Other developed nations have maintained inheritance taxes of varying amounts. The top five nations are outlined below.
