Ask the name of the UK’s most despised tax and you’ll probably get the answer: Inheritance Tax. After a lifetime of paying taxes on your income, land, property and shares, the dreaded inheritance tax means the government squeezes your estate again when you die.
Unlike the UK, Australians have long rejected the idea as morbid. But all that could change thanks to the Greens.
Angry young Australians who find themselves locked out of the housing market are increasingly supporting the Greens, who campaign on “wealth inequality” and demand 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 high inheritance tax on their estate when they die, if the landowner-hating Greens force Labor’s hand.
If Labor wins the next election and is forced to rely on the Greens to form a minority government, a UK-style 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 advocates for an inheritance tax, calling it a “dynastic wealth tax, aimed at those who bequeath or donate large amounts.
“Wealth inequality is fundamentally unfair and requires structural economic change and wealth redistribution,” he says.
A spokesman for Greens senator Nick McKim, who holds the Economic Justice and Treasury portfolios, played down any suggestion the party was “proposing an inheritance tax at the next election”, saying it was not policy. of the party.
But if that changes, and given that the party is 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 valued at more than £325,000 (AU$634,000), a threshold known as the “nil rate band”. A 40 percent tax is applied to assets above this threshold.
If you are married or in a civil partnership, all property and assets go to the surviving spouse free of inheritance tax, as long as the deceased left a will naming you as their beneficiary. If someone dies intestate (without a will), the first £322,000 of the estate passes to the surviving spouse. However, if the estate is larger, the spouse receives half of the remainder tax-free and the other half goes to the deceased’s children, if any, who may have to pay taxes.
Children pay inheritance tax on their parents’ estates above £325,000, but also get an additional tax-free allowance of £175,000 per parent if the value of the estate resides in the property, meaning they can inherit up to £1 million of property tax-free. . This only applies if the total value of the estate is less than £2 million.
The UK House of Commons Library said that in the 2020-21 financial year, 3.73 per cent of deaths resulted in inheritance tax having to be paid, meaning the tax It was applied to 27,000 inheritances.
The UK Parliamentary Library explained that the wealthy, whose estates faced an inheritance tax, were more likely to own shares than those with assets less than £1 million ($A1.95 million).
“Wealthier properties are more likely to have a higher proportion in securities or other assets,” he said.
“Those with properties valued at less than £1 million are more likely to be made up primarily of residential properties and cash.”
Angry young Australians who find themselves locked out of the housing market are increasingly supporting the Greens, led by Adam Bandt (second from left), who campaign on “wealth inequality” and demand a “wealth redistribution” radical.
Australia’s experience
Australia abolished inheritance taxes in July 1979, a year after Queensland’s eccentric Country Party premier Joh Bjelke-Petersen led the push to get rid of inheritance taxes.
Liberal Prime Minister Malcolm Fraser eliminated the federal inheritance tax 45 years ago, and in 1982 all states followed.
But in 1985, under Bob Hawke’s Labor government, a federal capital gains tax was introduced, 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.
If the Greens force Labor to introduce an inheritance tax, there are ways to protect your estate from the taxman (file image)
How to protect your family’s assets
If the Greens force Labor to introduce an inheritance tax, there are ways to protect your estate from the taxman.
The following strategies are commonly used in countries where an inheritance tax already exists.
However, it is important to remember that 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 passed between spouses and civil partners are generally exempt from inheritance tax, provided there is a will.
Should inheritance tax be introduced in Australia, a similar rule would likely apply. Therefore, by leaving assets only to a spouse and not to their descendants, you can defer the tax until after the spouse’s death.
- Early inheritance and gift of assets during your life
Generally speaking, the smaller the size of your estate, the less taxes will be paid in the event of your death.
So an easy way to pay less estate taxes is to gift assets to heirs while you’re still alive. This not only reduces the size of your estate, but also allows a parent or grandparent to watch their child or grandchild enjoy their gift.
Depending on how estate tax laws are structured, donating assets a certain number of years before death could reduce your taxable estate, meaning it’s a good idea to transfer the gift when you’re in good health.
For example, the United Kingdom has a “seven-year rule,” which means that if you die within seven years of giving an asset (e.g., money, possessions, property) to a beneficiary, the donation may still be subject to inheritance tax. But after seven years, the gift does not count toward the total value of your estate.
When placing assets in a discretionary trustYou can ensure that 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 be another option to avoid inheritance tax, as they allow a beneficiary to use your property after your death, either to live in it or generate income, without having full legal ownership.
This type of agreement can be useful if you want to support someone immediately after your death, but ultimately want your property to go to someone else.
- Get life insurance, but trust the policy in a trust
Purchasing life insurance means your loved ones will receive a payout after you die. In the UK, this can count as part of your estate when you die, and if you cross the ‘nil rate band’ threshold, 40 per cent inheritance tax applies.
However, the payment may be exempt from inheritance tax – but you have to set it up correctly, ideally with the help of a financial advisor.
To prevent a life policy payment from being transferred to your estateThe British put it in trust, meaning that the proceeds from the policy are paid directly to the named beneficiaries, rather than to your legal estate.
- Take advantage of charitable legacies
Many inheritance tax systems around the world allow exemptions or reductions if a portion of the estate is left to charity.
Donating part of your estate could reduce your overall taxable amount, with the added benefit of helping a cause you care about.
- Consider structuring asset ownership.
In countries with inheritance taxes, holding assets in joint ownership can sometimes allow for a more tax-efficient transfer of assets.
The surviving co-owner could automatically inherit the property in its entirety without contributing to the “nil rate band”.