Inheritance tax has always been a controversial levy, with many arguing that it effectively double taxes wealth and disincentivizes practices such as saving and investment. It also invariably leads to a bloated taxation system, with the UK alone banking a record £7.1 billion in IHT last year as the number of families affected by the 40% levy continues to rise.
However, the UK is one of the few developed economies to enforce inheritance tax legislation so rigorously, with just six US states doing so as of 2023. Canada and Sweden have both abolished inheritance tax completely in recent times, with the former having taken this step under Prime Minister Pierre Trudeau in 1971.
But why did nations like Canada and Sweden take this measure, and will it inspire the UK and similar jurisdictions to follow suit in the future?
The Logic Behind Eradicating Inheritance Tax
When the Canadian government of 1971 moved to abolish inheritance tax, it did so in the belief that this particular levy created terrible disincentives in the form of double wealth taxation. It also sought to indirectly punish savings and investment, creating significant long-term effects in the economy.
As a result, an inheritance tax windfall isn’t subject to taxation in Canada, while recipients don’t have to report their payout as income. So, although indirect taxes can be incurred over time, the government no longer hits beneficiaries with a single, direct levy.
Sweden decided to abolish its own national inheritance and gift tax in 2004, following a unanimous vote in the Riksdag. This levy had existed in various forms in the country since the 17th century and was historically calculated on the value of the beneficiaries share of the total estate in question.
By 1983, the inheritance tax levy had reached a top rate of 70% (applicable to spouses and children), falling to 30% in 2004 before being abolished completely.
Like Canada, the Swedish also abolished the levy as a result of its negative impact on business and the economy. One of the most significant issues revolved around the impact on family business during intergenerational succession, with beneficiaries having to pay a significant tax levy on income and assets that had already been heavily taxed during their lifespan.
Similarly, surviving spouses often found that they could no longer afford to live in the remaining family home, which was simply too heavily taxed and completely stripped of equity. This has long-term and indirect economic consequences, while also placing a strain on social security safety nets.
Creating a Lean but Efficient Tax System
It should come as no surprise that Canada and Sweden are among the nations to strike down inheritance tax, with both having experimented with progressive and evolutionary tax systems over time.
It can also be argued that this decision has contributed to a much leaner tax framework and more prosperous economy over time, with Sweden in particular on a par with the OECD best performers when it comes to their GDP value per capita.
Productivity in Sweden is also approximately 8% higher than the OECD best performers, with this indicative of a motivated and energised labour force and may be in part attributed to the removal of disenfranchising tax levies such as inheritance tax.
Both nations also fare well according to the metric of inequality, with this having stabilised in Canada through the noughties and produced an average Gini index reading of 0.32. In Sweden, inequality is also lower than in most advanced economies, with the poorest 20% of households earning 8.9% of total national income.
Again, it makes logical sense that inequality should be lower in jurisdictions that have implemented a fair and transparent tax system, and one that has done away with instances of double taxation. This leaves citizens with more money in their pockets over time and creates a more even playing field for all citizens.
The Bottom Line
There’s no doubt that the decision to abolish inheritance tax has benefited Canada and Sweden from an economic perspective, while it’s also economic and productivity reasons that have stopped 44 US states from enforcing an inheritance tax levy.
This is certainly an economic lesson that the UK would do well to learn from, especially given its lingering economic challenges and the sheer amount earned in inheritance tax last year.
Source: Featured News articles
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