Ask for the name of the UK’s most despised tax and you’re likely to receive the answer: Inheritance Tax. After a lifetime of paying tax on your income, land, property and shares, the dreaded inheritance tax means the government squeezes your estate once again when you die.
Unlike the UK, Australians have long rejected the idea as morbid. But that all could change – thanks to the Greens.
Angry young Australians who are locked out of the property market are increasingly supporting the Greens which campaigns on ‘wealth inequality’ and demands radical ‘wealth redistribution’.
If Labor wins next year’s election, it could well be forced to rely on the left-wing party to form a minority government. Even the most optimistic opinion polls show a two per cent swing against Anthony Albanese’s Labor Party, which would result in the government losing five seats and its majority.
In the event of a Labor/Greens coalition, Australia could face its first federal inheritance tax since it was abolished in 1979.
This would mean Australians with investment properties or a share portfolio could soon be paying a hefty inheritance tax on their estate when they die.
Australians with investment properties and shares could soon be paying a hefty inheritance tax on their estate when they die – if the landlord-loathing Greens force Labor’s hand
Should Labor win the next election and be forced to rely on the Greens to form a minority government, a UK-style inheritance tax is a distinct possibility
The Greens, which targets young renters and blame baby boomers for generational inequality, has an ‘economic justice’ platform that advocates an inheritance tax, calling it a ‘tax on dynastic wealth, targeted at those bequeathing or gifting large amounts’.
‘Wealth inequality is fundamentally unjust and requires structural economic change and wealth redistribution,’ it says.
A spokesman for Greens senator Nick McKim, who holds the Economic Justice and Treasury portfolios, downplayed any suggestion the party was ‘proposing an inheritance tax at the next election’, saying it wasn’t party policy.
But should that change, and with the party likely to hold the balance of power next year, here’s what it could mean for you:
How inheritance tax works in the UK
The UK has an inheritance tax on estates worth more than £325,000 (AU$634,000) – a threshold known as the ‘nil rate band’. Tax is charged on assets above this threshold at 40 per cent.
If you are married or in a civil partnership, all property and assets go to the surviving spouse free of inheritance tax provided the deceased has left a will naming them as its beneficiary. If someone dies intestate – without a will – then the first £322,000 of the estate goes to the surviving spouse. However, if the estate is larger than this, the spouse gets half of the rest tax-free, and the other half goes to the deceased’s children, if there are any, who may have to pay tax.
Children pay inheritance tax on their parents’ estates above £325,000, but also get an extra £175,000 tax free allowance per parent if the value of the estate lies in property – meaning they can inherit up to £1 million worth of property tax-free. This only applies if the total value of the estate is less than £2 million.
The UK’s House of Commons Library said that in the 2020-21 financial year, 3.73 per cent of deaths resulted in inheritance tax having to be paid, meaning the tax applied to 27,000 estates.
The UK’s parliamentary library explained that the rich, whose estates incurred an inheritance tax, were more likely to own shares than those with assets under £1million (AU$1.95million).
‘Wealthier estates are more likely to have a higher proportion held in securities or other assets,’ it said.
‘Those with estates valued at less than £1million are more likely to be mostly composed of residential property and cash.’
Angry young Australians who are locked out of the property market are increasingly supporting the Greens, led by Adam Bandt (second from left), who campaign on ‘wealth inequality’ and demand radical ‘wealth redistribution’
Australia’s experience
Australia abolished inheritance taxes in July 1979, a year after Queensland’s eccentric National Country Party premier Joh Bjelke-Petersen led the charge to get rid of death duties.
Liberal prime minister Malcolm Fraser scrapped the federal inheritance tax 45 years ago and by 1982, all the states followed.
But a federal capital gains tax debuted in 1985, under Bob Hawke’s Labor government, with an exemption on the family home.
The last time Labor formed a minority government with the Greens, former Labor PM Julia Gillard was forced to introduce a carbon tax in 2011 – despite vowing not to do so during the 2010 election campaign.
Greens leader Adam Bandt could try that same trick again and force Labor to introduce an inheritance tax.
Should the Greens force Labor to introduce an inheritance tax, there are ways you can protect your estate from the taxman (stock image)
How to protect your family’s wealth
Should the Greens force Labor to introduce an inheritance tax, there are ways you can protect your estate from the taxman.
The following strategies are commonly used in countries where inheritance tax is already in place.
However, it is important to remember tax laws vary between jurisdictions and what works in a European country, for example, may not necessarily apply in Australia.
- Leave everything to your spouse in your will
In Britain and other countries, any assets passing between spouses and civil partners are generally exempt from inheritance tax, provided there’s a will.
In the event of inheritance tax being introduced in Australia, a similar rule would likely apply. Therefore, by leaving assets solely to a spouse and not any descendants, you may defer the tax until after the spouse’s death.
- Early inheritance and gifting assets during your lifetime
Generally speaking, the smaller the size of your estate, the less tax is paid upon death.
So one easy way to pay less inheritance tax is to gift assets to heirs while you are still alive. This not only reduces the size of your estate, but allows a parent or grandparent to see their child or grandchild enjoy their gift.
Depending on how inheritance tax laws are structured, gifting assets a certain number of years before death might reduce the taxable estate – which means it’s a good idea to transfer the gift when you are in good health.
For example, the UK has a ‘seven-year rule’, which means if you die within seven years of gifting an asset (e.g. money, possessions, property) to a beneficiary, then the gift may still be subject to inheritance tax. But after seven years, the gift does not count towards the overall value of your estate.
By placing assets in a discretionary trust, you can ensure they are managed for the benefit of your heirs without transferring direct ownership.
Depending on how inheritance tax is structured in Australia, this could reduce or eliminate the tax burden.
Life interest trusts could another option to avoid inheritance tax, as they allow a beneficiary to use your property after your death – either to live in or generate income – without full legal ownership.
This type of arrangement can be useful if you want to provide for someone immediately after your death, but ultimately wish for your property to be left to another person.
- Get life insurance – but put the policy into trust
Taking out life insurance means your loved ones get a payout after your death. In the UK, this can count as part of your estate when you die – and if it crosses the ‘nil rate band’ threshold then the 40 per cent inheritance tax applies.
However, the payout can be exempt from inheritance tax – but you have to set it up correctly, ideally with the help of a financial advisor.
To stop a life policy payment getting rolled into your estate, Britons put it into trust, which means the proceeds of the policy are paid directly to your appointed beneficiaries, rather than to your legal estate.
- Take advantage of charity bequests
Many inheritance tax systems around the world allow for exemptions or reductions if a portion of the estate is left to charity.
Donating part of your estate could reduce the overall taxable amount, with the added benefit of helping out a cause you care about.
- Consider structuring ownership of assets
In countries with inheritance tax, holding assets in joint ownership can sometimes allow for a more tax-efficient transfer of assets.
The surviving co-owner might automatically inherit the property in its entirety without it contributing towards the ‘nil rate band’.
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