Will inheritance tax rise after the pandemic?

A new report has called for higher inheritance tax (IHT) after the Covid-19 pandemic to help tackle rising wealth inequality.

The Organisation for Economic Cooperation and Development (OECD) says that inheritance taxation can be "an important instrument to address inequality, particularly in the current context of persistently high wealth inequality and new pressures on public finances linked to the Covid-19 pandemic".

In the UK, IHT of 40% is paid on the value of your property, savings and other assets when you die. The first £325,000 of your estate is tax-free, so the tax only applies to anything above that level.

Only one in 20 estates pay inheritance tax, and there are several planning methods that can legally reduce or entirely mitigate your IHT liability, such as spousal and gift exemptions and charitable donations.

Inheritance Taxation in OECD Countries compares inheritance, estate and gift taxes levied in the 37 member countries of the OECD.

It highlights the high degree of wealth concentration in OECD countries as well as the unequal distribution of wealth transfers, which further reinforces inequality. On average, the inheritances and gifts reported by the wealthiest households (top 20%) are close to 50 times higher than those reported by the poorest households (bottom 20%).

Inheritance taxes -- particularly those that target relatively high levels of wealth transfers -- can reduce wealth concentration and enhance equality of opportunity, the authors argue.

However, the report also notes that currently, among the 24 OECD members that levy inheritance, estate and gift taxes, these taxes account for only 0.5% of total tax revenues.

Generous tax exemptions and other forms of relief which primarily benefit the wealthiest households are a key factor limiting revenue from these taxes, according to the report.

"While a majority of OECD countries levy inheritance and estate taxes, they play a more limited role than they could in raising revenue and addressing inequalities, because of the way they have been designed," said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. "There are strong arguments for making greater use of inheritance taxes, but better design will be needed if these taxes are to achieve their objectives."

Differences in IHT across countries mean that the level of wealth that parents can transfer to their children tax-free ranges from around $17,000 in Belgium to more than $11m in the United States. Tax rates also vary widely.

While reforms would depend on country-specific circumstances, the report favours an inheritance tax levied on the value of the assets that beneficiaries receive, with an exemption for low-value inheritances.

Scaling back "regressive" tax reliefs, better aligning the tax treatment of gifts and inheritances and preventing avoidance and evasion are also identified as policy priorities.

"Inheritance taxation is not a silver bullet, however," Saint-Amans added. "Other reforms, particularly in relation to the taxation of personal capital income and capital gains, are key to ensuring that tax systems help reduce inequality."