Nineteen EU countries impose inheritance, gift or estate taxes. However, when transferring property to close relatives, a very preferential regime is applied, so most inheritances remain tax-free.
Inequality in the distribution of wealth is widespread throughout Europe. The richest 10% of people on the continent own a staggering 67% of the wealth, while half of all adults together own just 1.2%.
The role of inheritance, estate, and gift taxes in addressing inequality is often debated. 19 of the 27 EU countries levy taxes on the transfer of wealth. However, revenues from such taxes exceed 1% of total taxation in only two EU countries, namely Belgium and France.
What is inheritance tax?
Inheritance taxes are imposed at the time of transfer of wealth, usually upon the death of the donor. This differs from classic wealth taxes, which are levied annually on a person’s property.
There is no inheritance tax in eight EU countries. As of 2022, according to the Tax Foundation think tank, which draws on the 2022 Worldwide Estate and Inheritance Tax Guide and PwC’s World Tax Brief, eight EU countries have no taxes on inheritance, property and donation. These are Austria, Cyprus, Estonia, Latvia, Malta, Romania, Slovakia and Sweden. Among the European Free Trade Association (EFTA) countries, there are also no wealth transfer taxes in Norway.
Since 2000, five countries have abolished inheritance taxes. These are Austria, the Czech Republic, Norway, Slovakia and Sweden. Estonia and Latvia have never charged it.
According to the Organization for Economic Co-operation and Development (OECD) Inheritance Tax report, dated 2021, there are many similarities in the design of inheritance, estate and gift taxes across Europe.
Most countries impose inheritance and gift taxes on recipients, while a minority impose taxes on donors. Only Denmark in the EU levies inheritance tax on deceased donors. The same rule applies in the UK.
Most countries give preference to spouses and direct descendants through higher tax exemption thresholds and lower tax rates. The most commonly taxed assets include primary residences, businesses, retirement savings and life insurance policies.
How do inheritance tax rules and rates differ?
Inheritance tax rules and rates vary by country and region, the value of the assets being inherited, and the degree of family closeness between the deceased and the recipient.
For example, in France, according to the Tax Foundation, different rates apply when transferring an inheritance to ascending and descending relatives, when transferring an inheritance between brothers and sisters, blood relatives up to the fourth degree, and everyone else.
Tax rates also vary significantly. Most countries have progressive tax rates, but regarding a third of countries have flat tax rates.
In 2022, the top inheritance tax rate ranged from 4% in Croatia to 88% in Spain, depending on the region.
Most European countries also have inheritance and estate tax exemption thresholds. They generally depend on the relationship between the donor and the heir, with more favorable exemption thresholds applying to closer family members.
They vary significantly across Europe, for example from almost 16,000 euros in Belgium to more than a million euros in Italy.
In many countries, inheritance tax revenues account for less than 1% of total taxation
Although the maximum inheritance tax rate exceeds 50% in several countries, revenue from inheritance, estate and gift taxes represents a very small proportion of total tax revenue in Europe. In 2019, the share of total tax revenue from these taxes was less than 1%, with the exception of Belgium (1.46%) and France (1.36%).
In the UK this figure was 0.71%, in Spain – 0.58%, in Germany – 0.52%, in Italy – 0.1%.
The reason for low income from inheritance and estate taxes is that in a number of countries, according to an OECD report, most inheritance remains untaxed. This is largely due to the highly favorable tax treatment applied to transfers of property to close relatives, as well as the benefits provided for the transfer of specific assets. Examples include your primary residence, business and farm assets, retirement assets, and life insurance policies.
“In a number of countries, inheritance and estate taxes can also be largely avoided by making gifts during one’s lifetime due to more favorable tax treatment,” the report says.
OECD report: Inheritance tax improves fairness
The report also suggests that well-designed inheritance taxes can increase revenue and improve fairness.
“From an equity perspective, an inheritance tax, particularly one that targets relatively high levels of wealth transfer, can be an important tool for increasing equality of opportunity and reducing wealth concentration,” the report says.
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2024-04-21 10:21:43
