Inheritance tax used to make the news only when it forced once super-rich dynasties to flog their heirlooms after the head of the family died. But suddenly, death is getting expensive for a much larger number of Europeans, and that's starting to attract the attention of politicians and headline writers across the Continent. Furious discussions about whether to limit, amend or suppress inheritance taxes broke out last week in both Britain and France. In Italy, meanwhile, there's controversy and skepticism about plans by the new government of Romano Prodi to reinstate the inheritance tax abolished by former Prime Minister Silvio Berlusconi in one of his first acts on taking office in 2001.
The debate is erupting now because death duties of up to 40%, once paid only by the affluent, are starting to affect a growing number of middle-class Europeans and will likely hit millions more in the decade to come. "Inheritance tax used to be a problem for the rich. Now it's a problem for you and me," says Anne Young, a tax expert at the Edinburgh financial-services firm Scottish Widows, who calculates that about 1 in 3 of Britain's 24 million households now have estates that would fall within the taxman's reach. Young herself admits she has an inheritance-tax "problem."
Blame the explosion of house prices. Unlike their parents, European baby boomers tend to own their homes. As prices have soared over the past few years in almost every country except Germany, these homeowners have enjoyed big increases in the value of their total assets. But in many cases, the rise has pushed their net worth over the national minimum thresholds for inheritance tax, which haven't been adjusted in step with the housing boom. The result: almost anyone owning a detached house in London or southeast England is already well over the U.K. tax-free limit on estates of $540,000.
France is even tougher. There, inheritance tax is levied in theory from the first euro passed on, but a series of tax-free thresholds apply to family members, including a €50,000 one for children of the deceased. The value of even a modest two-bedroom apartment in central Paris is enough to push families into a 30% tax bracket (the top rate for them is 40%, for estates valued at over €1.7 million). For nonfamily members and unmarried partners, the situation is even more complicated, with inheritance tax rising as high as 60%. And unlike many other countries, where the tax is levied when assets are handed down a generation, husbands and wives in France are subject to death duties on what they inherit from their spouses.
That has long rankled some French lawmakers and lobbyists. In October 2003, a group of French Deputies from President Jacques Chirac's center-right party proposed a parliamentary resolution to abolish inheritance tax altogether. It went nowhere. Another initiative last year to exclude principal residences from the tax suffered the same fate. But last month, news leaked out that the Finance Ministry is considering plans to suppress inheritance tax between spouses in next year's budget. The prospect of such a measure, estimated to cost the treasury about €400 million per year in lost revenue, immediately sparked uproar, with the opposition Socialist Party condemning it as an "unacceptable gift to the well off." Less predictably, it was also criticized as "inopportune" by Pierre Méhaignerie, a conservative and Chirac ally who heads the Parliament's finance committee. Méhaignerie told the French daily Le Figaro that the government should not "take the risk of being subject to the slogan everything for the rich." Instead he suggested a big injection of funds into a bonus scheme for unemployed people who take jobs. His comments reflect concern among right-wing politicians, and not just in France, that fiddling with inheritance tax will play badly with voters still accustomed to associating the tax with the very rich. In Germany, for example, taxpayer lobbyists argue that the national inheritance-tax threshold should be raised significantly, or the tax abolished altogether. But Michael Jäger, secretary-general of the Bavarian Taxpayers' Association, acknowledges that "any discussion of wealth or inheritance tax immediately turns into a discussion about envy."
In the U.K., by contrast, the big debate about inheritance tax is taking place on the left, in Prime Minister Tony Blair's Labour Party. It was prompted by a former Cabinet minister, Stephen Byers, who called for inheritance tax to be abolished, arguing that it was now hurting middle-class homeowners, including those in marginal electoral constituencies. It was a politically charged call because Byers is a close ally of Blair and an outspoken opponent of his likely successor Gordon Brown, the Chancellor of the Exchequer. The danger for Labour, Byers told the British broadsheet the Sunday Telegraph, is that when Blair leaves office, as he has promised to do before the next election, "voters will feel that the pragmatic and modernizing approach of New Labour has gone with him." Byers also argued that the tax is unfair because the very wealthy tend to get advice on how to avoid paying it, but "this is not an option if your only asset of any real worth is the family home."
Brown supporters quickly counterattacked, pointing out that inheritance tax brings in about $6 billion in revenue annually and depicting it as a levy on a small élite. "If you get rid of it, it follows that some other tax has to go up or you have to cut some public spending, on health and education," countered Alistair Darling, the Trade and Industry Secretary. Abolishing inheritance tax "may make for a headline, but I don't think it makes for a prudent and sensible tax and spend policy."
When it comes to the figures, both sides are right. It's true that only a fraction of British households pay inheritance tax it's currently levied on about 6% of the estates of people who die. But that percentage will change dramatically in the next 15 years as the baby-boomer generation starts to die off and pass its property and other assets onto the next. Halifax Financial Services, one of the nation's leading home-mortgage firms, calculates that property worth $680 billion will change hands between now and 2020 about 10% of the total housing stock in the nation and the largest transfer of housing wealth in British history. The impact is so big because the baby boomers have transformed home ownership: about 70% of households now own their own homes, more than double the 31% that did in 1946, according to Halifax, a subsidiary of the financial-services group HBOS. The firm reckons the inheritance-tax threshold should be raised substantially, to $813,000, to bring it in line with the 179% increase in house prices over the past decade. "The threshold needs to reflect what happened in the property market," says Tim Crawford, group economist at HBOS.
"A lot of people may not realize they are sitting on a gold mine," says Young of Scottish Widows, whose research suggests that more than 40% of those whose assets now would make their estates liable for inheritance tax don't even realize it. The firm earlier this year began a public-awareness campaign pointing out that it is possible to avoid the tax by judiciously transferring assets to the next generation before death, or buying life insurance to cover the tax bill and Young says the current debate is useful for bringing the issue to national attention.
In France, Benoîte Taffin of the tax lobby group Contribuables Associés is less optimistic. She worries that the Finance Ministry may be just floating a trial balloon, and will now back away from even a "timid" change. As for Italy, the Prodi campaign promise to reinstate inheritance tax has so far not become a reality. The fragile coalition government disagrees over whether or not to make the issue a priority, and, if so, at what level the tax should kick in. Prodi himself has said it should only affect people with estates valued at "various millions of euros." There's a chance the tax may not be reintroduced at all.
Whatever happens in any of these countries, the question of whether the middle classes should now be required to pay inheritance tax will keep the politicians, and headline writers, busy for a long time to come.