A recent article in the Daily Telegraph revealed that no less than 10 countries in the Organisation for Economic Co-operation and Development (OECD), including Australia, have abolished inheritance taxes.
According to the OECD, the reasons for abolition ranged from a lack of political support for such taxes, and their legitimacy being eroded through mitigation opportunities that primarily benefited wealthier taxpayers.
Tax on inherited wealth and effective ways to manage the transfer of your wealth to your beneficiaries on your death are common issues that come up in many client’s meetings. This is especially the case for clients who are planning to emigrate to Australia from the UK, and those who have recently made the move.
The UK still has a 40% Inheritance Tax
If you have lived and worked in the UK, you’ll be aware that Inheritance Tax (IHT) is still payable on the value of some estates.
IHT is chargeable at 40% of the value of your UK-based assets above your nil-rate band, which is £325,000 in the 2023/24 tax year, and frozen at that figure until 2028.
There is also an additional residential property nil-rate band of £175,000 if you plan to leave your main home to your direct descendants.
As these allowances will automatically pass to your surviving spouse or civil partner on your death, a total of £1 million could ultimately pass to your heirs, free of IHT.
HM Revenue & Customs (HMRC) data shows the government collected a record amount through IHT in 2022/23. In total, families paid £7.1 billion in IHT in the last tax year.
The Australian equivalent of Inheritance Tax was abolished over 40 years ago
In contrast to the UK, Australia’s federal estate tax was abolished in 1979, and every state had eliminated their equivalent “death duty” tax systems by 1982.
The primary reason for abolition was that, as a tax, it had become too hard to administer effectively, and had created severe financial issues for a cohort of people who were not that wealthy.
For example, under the system, if a farmer died and passed on his farm to his son, a sudden tax bill would be difficult to pay without selling the property. It was also argued that the farm had simply just changed hands, so there was no lump sum of money to provide liquidity.
This situation resulted in property having to be sold at relatively short notice and at some inconvenience to the surviving family.
At the same time, wealthier individuals were setting up trust arrangements, or creating shell companies to shelter assets from estate tax and death duties.
Tax on inherited wealth is derived through Capital Gains Tax
In 1982, the Australian Tax Office (ATO) introduced a Capital Gains Tax (CGT) with the aim of generating revenue in a way that was more effective and equitable.
In other OECD countries where inheritance taxes have been abolished and replaced by an alternative tax on capital gains, death is treated as a CGT-chargeable event. However, this is not the case in Australia.
Instead, CGT is paid when the inherited assets within an estate are sold and a profit is realised, rather than a person’s death triggering a tax bill.
Even then, there can be exemptions. The deceased’s family home could be completely exempt from CGT provided that it is sold within two years of death.
Your tax obligations when you receive an inheritance
While there is no IHT in Australia, if an asset you inherit generates an income – such as a rental property – you will need to pay tax on this.
Likewise, if you receive shares, you are required to pay tax on the dividends you receive.
The tax that needs to be paid on rental income or share dividends is generally calculated from the date that the benefactor died and passed on the asset.
Death benefits from a super fund
If the deceased person had a super fund, it will be down to the trustees to ascertain who will receive benefits. A super paid after a person’s death is called a “super death benefit”.
Whether or not tax is payable on a super death benefit depends on several factors. These include:
- If you are a dependant of the deceased under tax law
- Whether the super death benefit is paid as an income or a lump sum
- If it’s paid as income, your age and the age of the deceased person when they died
- The underlying tax components and their assessment.
The dependant is usually their spouse or child, although it can also be someone they had a long-term relationship with, such as a live-in carer or close family member who is provided with financial support.
3 handy tips to help you plan your estate management
Here are three handy steps you may wish to consider to help you effectively manage your estate, and how your wealth is passed on to your intended beneficiaries.
These are particularly applicable if you have assets in both the UK and Australia.
1. Ensure you have wills set up
Setting up a will should be one of your top financial priorities. If you have assets in both the UK and Australia, you should have a will for each. This creates a clear demarcation between your UK- and Australian-based assets.
2. Make sure your records are in good order
By keeping track of your assets and tax details, you can avoid unnecessary stress when it comes to managing these and completing any ATO and HMRC returns. It also makes sense to keep details of your Australian assets separate from those remaining in the UK.
3. Start your estate planning now
It’s never too soon to start planning for what happens to your assets when you die. Clearly your plans may need to be amended as details around your wealth, and potential beneficiaries, change. But by making a start, you can ensure the ongoing process is straightforward.
Get in touch
If you’d like to talk about any aspect of your estate planning, please get in touch with us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.