Inheritance tax is consistently cited as one of the most unpopular taxes in our country. Calls for its abolition are regularly made by both the public and politicians. Nowadays, however, there are also voices arguing in favour of increasing inheritance tax. Higher rates will help to counteract the growing wealth inequality in our country.
Double taxation
A major objection to inheritance tax is that it is perceived as a tax on wealth on which tax has already been levied. Although this is how it is perceived intuitively, it is not the case. Inheritance tax is, in fact, paid by the heir. The heir has not previously paid tax on the assets acquired through the inheritance and has not had to do anything to obtain them. Moreover, in almost all cases, there is double taxation: after you have paid income tax on your earnings, you then also pay VAT on your purchases.
Political compromise
Many political parties focus on reducing inequality amongst citizens. The emphasis here is on reducing income disparities. However, according to Statistics Netherlands (CBS), income inequality is not as severe as one might think. The government tackles income inequality through measures such as taxation, benefits and allowances.
However, wealth inequality is extremely high. As the wealth of the wealthy is passed on to the next generation through gifts and inheritances, this inequality is perpetuated. Proponents of increasing inheritance tax therefore regard inheritances as a major cause of growing wealth inequality. They advocate a higher tax on inheritances and a lower tax on income that people have had to work for themselves.
Higher inheritance tax could be an effective means of tackling wealth inequality. Inheritance tax is therefore expected to be a topic of discussion during the forthcoming cabinet formation talks.
Rates and exemptions for 2021
The inheritance tax rates – which, incidentally, are the same as the gift tax rates – depend on who receives the inheritance:
- For a partner and children, a tax rate of 10% applies to the first €128,750 and a rate of 20% to the amount above that;
- For grandchildren and further descendants, a tax rate of 18% applies to the first €128,750 and a rate of 36% to the excess;
- For other heirs (brothers/sisters, nephews/nieces, and so on), a tax rate of 30% applies to the first €128,750 and a rate of 40% to the amount in excess of that.
It is not only the tax rate that depends on the relationship between the deceased and the heir, but also the exemptions that apply:
- for a partner, an exemption of up to €671,910 applies;
- children, grandchildren and great-grandchildren are entitled to an allowance of €21,282;
- For other heirs, an exemption of €2,244 applies.
The amount of the exemption may be bequeathed tax-free.
Changes to the Business Succession Scheme (BOR)
The business succession schemes set out in the Income Tax Act 2001 and the Inheritance Tax Act 1956 have also been the subject of debate for some time. These schemes ensure that, when an active business is inherited, the payment of income tax is deferred and the inheritance tax liability is significantly reduced. The aim of the scheme is to safeguard the continuity of the business, but research shows that in most cases, the tax due following the death of a shareholder can be paid without jeopardising the business. According to some, this creates too wide a gap between the tax payable on the inheritance of a business and cases where this is not the case. Calls for the abolition or amendment of the business succession scheme have become increasingly vocal in recent years. However, there are just as many signals from the political sphere that the aim is, in fact, to maintain the scheme.
Jubelton
It is possible to make a one-off gift of over €100,000 to someone under the age of 40 for the purchase of their own home. The question is whether this generous exemption will survive the coalition formation process unscathed. This scheme may also be restricted with a view to tackling existing wealth inequality.
It remains to be seen whether inheritance tax, the business succession scheme and the ‘jubelton’ will be amended during the coming term of office. We are monitoring developments closely and will keep you up to date.