Ask the name of Britain’s most despised tax and you’ll probably get the answer: inheritance tax. After a lifetime of paying taxes on your income, land, assets and shares, the dreaded inheritance tax puts the government once again under pressure on your estate when you die.
Unlike Britain, Australians have long rejected the idea as morbid. But that could all change – thanks to the Greens.
Angry young Australians locked out of the property market are increasingly backing the Greens, who are campaigning against ‘wealth inequality’ and demanding radical ‘wealth redistribution’.
If Labor wins next year’s election, the country could be forced to rely on the left-wing party to form a minority government. Even the most optimistic opinion polls show a swing of two percent against Anthony Albanese’s Labor Party, which would result in the government losing five seats and its majority.
In the event of a Labour/Greens coalition, Australia could face its first federal inheritance tax since its abolition 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 face a hefty inheritance tax on their estate when they die – if landlord-hating 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 British inheritance tax is a distinct possibility.
The Greens, who target young renters and blame baby boomers for generational inequality, have an “economic justice” platform that calls for an inheritance tax, calling it a “dynastic wealth tax” aimed at those who leave or donate large amounts of money ‘.
“Wealth inequality is fundamentally unjust and requires structural economic change and wealth redistribution,” the report says.
A spokesman for Greens Senator Nick McKim, who holds the Economic Justice and Finance portfolios, played down any suggestion that the party would “propose an inheritance tax at the next election” and said this was not party policy.
But if that changes, and the party is likely to maintain the balance of power next year, here’s what it could mean for you:
How inheritance tax works in Britain
Britain levies inheritance tax on estates worth more than £325,000 (AU$634,000) – a threshold known as the ‘zero rate band’. Assets above this threshold are taxed at 40 percent.
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 a beneficiary. If someone dies without a will, the first £322,000 of the estate goes to the surviving spouse. However, if the estate is larger, the spouse gets half of the remainder tax-free, and the other half goes to the deceased’s children, if any, who may have to pay taxes.
Children pay inheritance tax on their parents’ estates over £325,000, but also get an extra £175,000 tax-free allowance per parent if the value of the estate is in property – meaning they can inherit up to £1m of property tax-free . This only applies if the total value of the estate is less than £2 million.
Britain’s House of Commons Library said that in the 2020-2021 financial year, 3.73 percent of deaths resulted in inheritance tax being payable, meaning the tax applied to 27,000 estates.
The British Parliamentary Library explained that the wealthy, whose estates had to pay inheritance tax, were more likely to own shares than those with assets of less than £1 million (AU$1.95 million).
“Wealthier estates are more likely to have a greater proportion of them held in securities or other assets,” the report said.
‘Those with estates worth less than £1 million are likely to consist mainly of residential properties and cash.’
Angry young Australians locked out of the property market are increasingly backing the Greens, led by Adam Bandt (second from left), who are campaigning against ‘wealth inequality’ and demanding radical ‘wealth redistribution’
The Australian experience
Australia abolished the inheritance tax in July 1979, a year after Queensland’s eccentric National Country Party premier Joh Bjelke-Petersen led the charge to abolish the inheritance tax.
Liberal Prime Minister Malcolm Fraser scrapped the federal estate tax 45 years ago and all states followed suit in 1982.
But in 1985, a federal capital gains tax was introduced under Bob Hawke’s Labor government, with an exemption for the family home.
The last time Labor formed a minority government with the Greens, former Labor Prime Minister Julia Gillard was forced to introduce a carbon tax in 2011, despite promising not to do so during the 2010 election campaign.
Greens leader Adam Bandt could try the 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 tax authorities (stock image)
How to protect your family’s assets
Should the Greens force Labor to introduce an inheritance tax, there are ways you can protect your estate from the tax authorities.
The following strategies are commonly used in countries where inheritance taxes are already in effect.
However, it is important to remember that tax law varies by jurisdiction and what works in a European country, for example, may not necessarily apply in Australia.
- Leave everything to your partner in your will
In Britain and other countries, all assets passed between spouses and civil partners are generally exempt from inheritance tax, provided there is a will.
If inheritance tax were introduced in Australia, a similar rule would likely apply. By leaving the assets solely to the spouse and not to any descendants, you can defer taxes until after the spouse’s death.
- Early inheritance and gift assets during your lifetime
In general, the smaller the size of your estate, the less tax you pay upon death.
So an easy way to pay less inheritance tax is to donate assets to heirs while you’re still alive. This not only reduces the size of your estate, but also allows parents or grandparents to see how their child or grandchild enjoys their gift.
Depending on how estate taxes are structured, donating assets a certain number of years before death can reduce the taxable estate. This means that it is a good idea to transfer the donation if you are in good health.
For example, in the UK there is a ‘seven-year rule’, which means that if you die within seven years of gifting an asset (e.g. money, assets, real estate) to a beneficiary, the gift may still be subject to inheritance tax. But after seven years, the donation no longer counts towards the total value of your estate.
By placing assets in a discretionary trustyou can ensure that they are managed for the benefit of your heirs, without directly transferring ownership.
Depending on how inheritance tax is structured in Australia, this can reduce or eliminate the tax burden.
Life interest trusts Another option could be to avoid inheritance tax, as this allows a beneficiary to use your property after your death – to live in it or generate income – without full legal ownership.
This arrangement can be useful if you want to care for someone immediately after your death, but ultimately want your assets to be left to someone else.
- Get life insurance, but trust the policy
By taking out life insurance, your surviving relatives will receive a benefit after your death. In Britain this can count as part of your estate when you die – and if it exceeds the nil rate threshold, the 40 percent inheritance tax applies.
Well, the payout may be exempt from inheritance tax – but you have to set it up properly, ideally with the help of a financial advisor.
To prevent the payment of a life policy from ending up in your estateThe British have taken it into trust, meaning the policy proceeds are paid directly to your nominated beneficiaries, rather than to your legal estate.
- Take advantage of charitable donations
Many inheritance tax systems around the world allow exemptions or reductions if part of the estate is left to charity.
By donating part of your estate, you can reduce the overall taxable amount, with the added benefit of supporting a cause you care about.
- Consider structuring asset ownership
In countries with inheritance taxes, holding jointly owned assets can sometimes allow for a more tax-efficient transfer of assets.
The surviving co-owner can automatically inherit the property in its entirety, without contributing to the ‘zero interest band’.