6 things you should know about inheritance tax; legal implications if a property is gifted versus inherited

The last few weeks have witnessed a debate centered on the issue of inheritance tax. This was prompted by the comments of overseas Indian Congress president Sam Pitroda, which led Prime Minister Narendra Modi to accuse the Congress of wanting to take away wealth from people even after death.

Read also: PM Modi corners Congress after Sam Pitroda fuels wealth row

Here’s a look at what inheritance tax means, the tax and legal implications of gifting a property versus inheriting it through a will, and the countries where inheritors are required to pay this tax.

1 What is inheritance tax?

Inheritance tax refers to the tax levied on the value of the inheritance received by a beneficiary on a person’s death.

Read also: Inheritance tax in eye of political storm amid Lok Sabha elections

Inheritance tax, or death taxes, or inheritance tax, as it may be called, are all taxes paid on the estate of the deceased. “This would be collected from the estate before distributions to heirs under the will or heirs under the laws of intestate succession,” explains Bijal Ajinkya, partner at Khaitan & Co.

2 What was the law of patrimony duty?

Property duty was introduced in India through Act no. The Law classified the properties based on the values ​​of the applicable slabs with the corresponding tax rates.

“The patrimonial law applied to both immovable and movable property. The right of ownership was only applicable if the inherited part of the property exceeded the thresholds established by the Act. This was abolished in 1985,” said Jayshree Navin Chandra, Senior Partner, ZEUS Law Associates and Mona Dewan, Associate Director, ZEUS Law Associates.

3 Why was the Heritage duty abolished?

The property tax was abolished as it faced public opposition due to its high rates, which reached 85% due to the high value of the property. “The imposition of property tax led to numerous litigations because the rates varied according to the value of the property. It was also widely criticized and perceived as a double tax alongside the property tax. The high administrative costs and the time involved in the collection of property rights compared to meager collections led to its abolition,” Chandra and Dewan said.

“The rate was gradual, with the maximum rate being 85 per cent. It was abolished as the valuation required to calculate the inheritance was an expensive affair leading to high administrative costs which made the cost of administration higher than the tax on the property collected. It should be noted that at that time the wealth in India was in smaller pockets and the disclosures were also not at their peak,” Ajinkya said.

4 Do the beneficiaries have to pay inheritance tax on the assets they inherit today?

There is no income tax or stamp duty payable on inherited property in India. Nor the capital gains tax. Only a court fee will be payable on the application for evidence. Even if the beneficiary of an Indian property is outside India, most countries do not tax on the basis of receipt of an inheritance.

5 What are the tax and legal implications if a property is gifted versus inherited by will?

If real estate is gifted, income and capital gains taxes will not apply as long as the recipient and the “donor” are not both related under income tax law. If they were not relatives, the beneficiary would pay tax at the ordinary rates applicable to such a person. It is important to note that there is an exemption limit applicable to gifts up to ₹50,000. There could be stamp duty on gifts, depending on the state where the property is, as well as the type of gift, i.e. real estate, shares, Ajinkya said.

Read also: Is inheritance tax feasible again in India? A legal perspective

Any assets that pass through a will are not subject to any income tax or capital gains tax or stamp duty.

6 Inheritance tax in other countries

Estate or inheritance taxes are applicable in many countries around the world, such as the United States, United Kingdom, Japan, South Korea, Spain, Germany and France.

In Japan, inheritance tax rates are considerably high, with the current highest rate at 55%.

In the United States, estate tax rates have been capped at 40% and is applicable to the agent’s worldwide estate.

In the UK, inheritance tax is based on the deceased’s state of residence. UK domiciled worldwide wealth is taxed at the standard rate of 40% with certain exemptions.

On the other hand, in France, the rates of the estate tax are based on the relationship of the beneficiary with the deceased and the value of the inheritance and ranges between 5% and 60%.

“In the United States and the United Kingdom, there is an inheritance tax and an inheritance tax, respectively, that apply to the transfer of assets on death. It is important to note that there is a minimum annual basis exemption for annual gifts, not however, gifts in excess of the basic annual exemption are counted for a consolidated Gifts and Estates Act. Therefore, lifetime gifts and inheritances are governed by the same law. A person cannot strip his wealth during his lifetime by making gifts and reducing their assets from an asset rights perspective,” explained Bijal Ajinkya, partner at Khaitan & Co.

“The assets that are transmitted to the spouse do not generate taxes and, in fact, the assets of the surviving spouse receive a consolidated limit of the pre-deceased spouse and their asset limit upon transfer. Therefore, when the surviving spouse passes, the estate will benefit from two exemption limits and only the remainder will be subject to inheritance or inheritance tax,” he said.