Inheritance Tax

What is Inheritance Tax?

Inheritance tax is a tax paid by a person or persons who inherit the estate (money or property) of a deceased person. In some jurisdictions, the terms “estate tax” and “inheritance tax” can be used interchangeably. In the United Kingdom and a few Commonwealth countries, the tax is also called the “death duty,” but not in a legal context.

Understanding Inheritance Tax

The inheritance tax is essentially collected from the heirs or beneficiaries of the estate of a deceased person. The tax is payable upon the transfer of the estate to the beneficiaries. In most cases, each heir is responsible for paying their own inheritance tax based on the portion of the estate inherited.

The relationship between the deceased person and the beneficiary may impact the necessity to pay the inheritance tax. For instance, spouses are generally excluded from paying the tax. In addition, the entities and organizations that receive the estate as a charitable donation from the deceased person are not required to pay the tax as well.

The lineal descendants, and ancestors, including parents, children, siblings, and grandparents, as well as remote relatives and non-relatives, typically must pay the inheritance tax. However, the remote relatives and non-relatives generally face a much higher tax rate as compared to the close relatives.

Generally, the tax is imposed based on the value of the estate. In certain scenarios, if the value of the estate is below a predetermined benchmark, it will not be imposed.

Inheritance Tax Around the World

The inheritance tax is not present in all countries. Some forms of the tax exist in Belgium, Denmark, France, Germany, Italy, Japan, the United Kingdom, and the United States. Note that in the US, some states do not impose such a tax.

At the same time, some countries, such as Australia, Canada, Hong Kong, Israel, New Zealand, and Russia no longer impose this tax. Instead of the tax, some of the countries impose capital gains tax on the asset’s sale or ownership transfer in case of the death of the owner.

Estate Tax

Strictly speaking, inheritance tax and estate tax are two different terms. While the inheritance tax is applied on the transfer of the estate from the deceased person to his or her heirs, the estate tax is imposed on the net value of the estate as of the date of death. However, the true meanings of the two terms vary among jurisdictions.

In some jurisdictions, both taxes are imposed. In this case, a beneficiary may be taxed twice.

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)® certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• Ad Valorem Tax
• How to Use the IRS.gov Website
• Indirect Taxes
• Permanent/Temporary Differences in Tax Accounting
• See all accounting resources