Inheritance Tax
Inheritance Tax : India and World
Inheritance Tax, as the word suggests, is charged on the property inherited by the legal heirs in the event of death of their predecessor. However, there is a thin line between the commonly known Estate tax and Inheritance tax. Many countries make a demarcation between the two, while in other countries both are considered at par. The demarcation is made on the basis of the fact that not all of the deceased’s property may be transferred to the legal heir. Thus, there arises a need to draw a line between the two. Only tax on that much of the property as in Inherited by the legal heir would be considered as Inheritance tax.
Inheritance Tax structure in USA:
In the US, Inheritance tax is charged at the state level. However, not all states have an incorporated structure of Inheritance tax. In the US law, a clear demarcation has been made between an estate tax and Inheritance tax. In the event of death of a person, the assets left behind by him reside in a temporary pool of assets. The Estate tax is then charged at the federal level on this pool of assets. After the payment of such tax, the remaining assets in the pool vest in the hands of the heir. The Inheritance tax is then charged at the state level on such inherited property. The existing Estate tax is charged at a rate of 40% over and above an exemption limit of 11.4 million USD. The rate of Inheritance tax differs from state to state.
Inheritance Tax structure in UK:
The UK has a single structure of Inheritance tax, where the property of the deceased is charged at a flat rate of 40% in the hands of the heir. However, a basic exemption limit of 3,25,000 Pounds has been provided, which can be extended to 5,00,000 Pounds in case the deceased’s estate includes a property. The extra allowance of 1,75,000 pounds (by the end of 2020) is known as the “Residence Nil-Rate Band”. Thus, any amount over and above the combined limit of 5,00,000 is charged at 40%. However, in cases where the estate is passed on to a living spouse or civil partner, Inheritance tax is not attracted. The deceased spouse can also pass on his/her share of allowance of 5,00,000 pounds to his/her living spouse. To sum up, if Mr. A has an estate of 12 lakh pounds (which includes a house), he can pass on the same to his wife without having her to pay any Inheritance tax. Now, when the estate passes on from Mrs. A to her heirs, she would be eligible for a total allowance of Rs. 1 million pounds (including her husband’s share of 5 lakh pound allowance) and Inheritance tax would be attracted only on the remaining 2 lakh pounds at the rate of 40%.
However, gifts made by predecessor whilst alive to legal heir up to a limit of 3,000 Pounds would not be treated as “estate” as long as the person is alive for 7 years from the date of making such gifts. However, if the person dies within 7 years of making such gratuitous transfer, the transfer so made, even though within the limit of 3,000 pounds, would be treated as the Deceased’s Estate and Inheritance Tax would be levied on the same.
Inheritance Tax in India:
The estate tax levied under the Indian Tax structure, which was charged at a high rate of 85%, was discontinued from 1985 and as of the current tax structure, there are no provisions relating to Estate Tax or Inheritance tax. The transfer of property as Inheritance is specifically exempted under section 56 (2) of the Income Tax Act, 1961. But, incomes arising from the property passed on to the heirs after the death of his predecessor will be subject to taxation. If and when the heir sells the inherited property, the same would be subject to Capital Gains. While the computation of such Capital Gains, the benefit of indexation would be available from the year of purchase of the original property.
Like India, some counties have abolished Inheritance Tax over the years, including Australia, Canada, Hong Kong, New Zealand, Russia, Singapore, Sweden.
Inheritance Tax, as the word suggests, is charged on the property inherited by the legal heirs in the event of death of their predecessor. However, there is a thin line between the commonly known Estate tax and Inheritance tax. Many countries make a demarcation between the two, while in other countries both are considered at par. The demarcation is made on the basis of the fact that not all of the deceased’s property may be transferred to the legal heir. Thus, there arises a need to draw a line between the two. Only tax on that much of the property as in Inherited by the legal heir would be considered as Inheritance tax.
Inheritance Tax structure in USA:
In the US, Inheritance tax is charged at the state level. However, not all states have an incorporated structure of Inheritance tax. In the US law, a clear demarcation has been made between an estate tax and Inheritance tax. In the event of death of a person, the assets left behind by him reside in a temporary pool of assets. The Estate tax is then charged at the federal level on this pool of assets. After the payment of such tax, the remaining assets in the pool vest in the hands of the heir. The Inheritance tax is then charged at the state level on such inherited property. The existing Estate tax is charged at a rate of 40% over and above an exemption limit of 11.4 million USD. The rate of Inheritance tax differs from state to state.
Inheritance Tax structure in UK:
The UK has a single structure of Inheritance tax, where the property of the deceased is charged at a flat rate of 40% in the hands of the heir. However, a basic exemption limit of 3,25,000 Pounds has been provided, which can be extended to 5,00,000 Pounds in case the deceased’s estate includes a property. The extra allowance of 1,75,000 pounds (by the end of 2020) is known as the “Residence Nil-Rate Band”. Thus, any amount over and above the combined limit of 5,00,000 is charged at 40%. However, in cases where the estate is passed on to a living spouse or civil partner, Inheritance tax is not attracted. The deceased spouse can also pass on his/her share of allowance of 5,00,000 pounds to his/her living spouse. To sum up, if Mr. A has an estate of 12 lakh pounds (which includes a house), he can pass on the same to his wife without having her to pay any Inheritance tax. Now, when the estate passes on from Mrs. A to her heirs, she would be eligible for a total allowance of Rs. 1 million pounds (including her husband’s share of 5 lakh pound allowance) and Inheritance tax would be attracted only on the remaining 2 lakh pounds at the rate of 40%.
However, gifts made by predecessor whilst alive to legal heir up to a limit of 3,000 Pounds would not be treated as “estate” as long as the person is alive for 7 years from the date of making such gifts. However, if the person dies within 7 years of making such gratuitous transfer, the transfer so made, even though within the limit of 3,000 pounds, would be treated as the Deceased’s Estate and Inheritance Tax would be levied on the same.
Inheritance Tax in India:
The estate tax levied under the Indian Tax structure, which was charged at a high rate of 85%, was discontinued from 1985 and as of the current tax structure, there are no provisions relating to Estate Tax or Inheritance tax. The transfer of property as Inheritance is specifically exempted under section 56 (2) of the Income Tax Act, 1961. But, incomes arising from the property passed on to the heirs after the death of his predecessor will be subject to taxation. If and when the heir sells the inherited property, the same would be subject to Capital Gains. While the computation of such Capital Gains, the benefit of indexation would be available from the year of purchase of the original property.
Like India, some counties have abolished Inheritance Tax over the years, including Australia, Canada, Hong Kong, New Zealand, Russia, Singapore, Sweden.