Inheritance tax

An inheritance or estate tax is a tax paid by a person who inherits money or property or a levy on the estate (money and property) of a person who has died.

International tax law distinguishes between an estate tax and an inheritance tax—an estate tax is assessed on the assets of the deceased, while an inheritance tax is assessed on the legacies received by the estate's beneficiaries. However, this distinction is not always observed; for example, the UK's "inheritance tax" is a tax on the assets of the deceased, and strictly speaking is therefore an estate tax. For historical reasons, the term death duty is still used colloquially (though not legally) in the UK and some Commonwealth countries.

Varieties of inheritance and estate taxes

Estate tax in the United States

The estate tax in the United States is a tax on the transfer of the estate of a deceased person. The tax applies to property that is transferred via a will or according to state laws of intestacy. Other transfers that are subject to the tax can include those made through an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, applies to transfers of property during a person's life.

In addition to the federal estate tax, many states have enacted similar taxes. These taxes may be termed an "inheritance tax." The tax is often the subject of political debate, and opponents of the estate tax call it the "death tax".

If an asset is left to a spouse or a federally recognized charity, the tax usually does not apply. In addition, up to a certain amount varying year by year can be given by an individual, before and/or upon their death, without incurring federal gift or estate taxes: $5,340,000 for estates of persons dying in 2014, $5,430,000 for estates of persons dying in 2015, and $5,450,000 for estates of persons dying in 2016. Because of these exemptions, only the largest 0.2% of estates in the US will have to pay any estate tax.

Inheritance Tax (United Kingdom)

In the United Kingdom, Inheritance Tax is a transfer tax. It was introduced with effect from 18 March 1986 replacing Capital Transfer Tax.

History

Prior to the introduction of a single Estate Duty by the Finance Act 1894, there was a system of five different inheritance taxes, that applied to either realty (land) or personalty (other personal property).