What Percentage is Inheritance Tax?

Introduction to Inheritance Tax

Inheritance tax, also known as estate tax or death tax, is a tax levied on the assets that individuals eventually inherit from someone who has passed away. The amount of tax owed depends on the amount of the inheritance, the deceased's location, and in some cases, the relationship between the deceased and the inheritor.

United States Inheritance Tax

In the United States, there is no federal inheritance tax. However, six states (Maryland, New Jersey, New York, Oregon, Pennsylvania, and Washington) have their own state inheritance taxes. Federal estate tax, on the other hand, is another form of inheritance tax.

Current Federal Estate Tax in the United States

According to the Internal Revenue Code for the year 2023, the federal estate tax exemption is $11.58 million per individual. This means that for estates valued at or below $11.58 million, no federal estate tax is due. For estates above this amount, the tax rate starts at 18% for amounts up to $10 million and escalates to 40% for amounts above $10 million. It's worth noting that this exemption amount is subject to change; President Biden has proposed lowering the exemption, which could see tax applicability for much smaller estates in the future.

In addition, if a person gifts a substantial amount (over $15,000 per year to one person) to a family member, it can reduce the estate tax exemption by that amount. For instance, if a person gifts $595,000, $580,000 can be used to reduce the estate tax limit to an even $11 million.

Sate Inheritance Tax in the United States

While there is no federal inheritance tax, six states in the US do impose their own inheritance tax:

Maryland: The tax is 10% on the first $100,000 and 15% on amounts over $100,000, with an additional 1%-3% tax on close family members. New Jersey: The tax rates range from 0% to 15%, depending on the relationship between the deceased and the beneficiary. New York: Tax rates vary from 1% to 16% based on the relationship between the deceased and the beneficiary. Oregon: The state offers no inheritance tax exemptions and applies a flat 10% tax on inheritances. Pennsylvania: The tax rate is 4.5% on inheritances over $50,000. Washington: The tax ranges from 0% to 10%, with exemptions for immediate family members.

Income Tax Exemptions and Gifting in the United States

Even if a state has an inheritance tax, it doesn't mean that the property must be sold to be taxed. If an inherited property is sold, the new owner may be subject to capital gains tax. Conversely, if movable assets such as mutual funds, gold, and stocks are inherited, no tax is generally due on these assets.

United Kingdom Inheritance Tax

In the UK, inheritance tax is levied on the assets that are left to beneficiaries following the death of the deceased. The rate is 40% on the entire value of the estate for assets above the nil-rate band of ￡172,000. However, there are various allowances and exemptions that can reduce the tax burden, such as the transferable nil-rate band and the residence nil-rate band.

Spain Inheritance Tax

In Spain, inheritance tax (herederos) is typically paid by the recipient of the inheritance. The tax rate varies depending on the relationship between the deceased and the heir, as well as the heir's wealth. For example, non-family members may pay a higher rate than immediate family members. The rates are structured to discourage the division of estates, which can result in higher taxes for subsequent generations.

Tips for Managing Inheritance Tax

To mitigate the impact of inheritance tax, consider the following strategies:

Utilize the maximum estate tax exemption to avoid paying unnecessary taxes. Use trusts and other estate planning tools to minimize liability. Evaluate the impact of gifting assets during one's lifetime to reduce the taxable estate.

For detailed guidance, it's recommended to consult a tax professional or attorney in the relevant jurisdiction.