Killing the death tax – an €11 million electoral ploy?

Tonio Fenech's plan to abolish inheritance tax on bequeathed and donated property could formalise what experienced notaries say is one of the most common forms of tax evasion for heirs.

The finance minister's last-minute decision to remove the 5% 'death tax' - which comes at a cost of some €11 million to the exchequer - has caught some officials inside the Inland Revenue Department off-guard, who are still awaiting instructions on how inherited property will be taxed.

But two notaries who spoke to MaltaToday confirmed that if the abolition of inheritance and donation duty survives a change in government - and the indications are that Labour in power will retain the EU-approved budget - more heirs can effectively evade paying capital gains tax.

Under the current system, heirs pay a 5% causa mortis tax on property they inherit. If they inherit a property valued at €100,000 they pay €5,000 in tax. If they then sell it at €150,000, they are taxed at 12% on the profit (€50,000).

"In reality, not all heirs declare they have inherited property," one notary who explained the system told MaltaToday.

"By law, heirs should declare such property within six months of the bequeather's death. Instead of declaring it, they wait until they have a price for the property. Once they sell it, they also declare this sale price as the value of the house they inherited. So they don't pay any capital gains tax, because there is no profit.

"What they will pay however once they sell property that is inherited, is the 5% duty and 8% interest on every year that passed since inheriting the property."

Evading the capital gains tax would work like this: hold on to the inherited property without declaring it, and once the property is sold declare the price of 'acquisition' as the final sale price. At zero profits, there is no capital gains tax. But on the sale of a €150,000 property, the heir must pay 5% death duty of €7,500 plus interest of some €600 on the first year.

The savings are considerable: declaring an inherited property that is valued at €100,000 would have incurred €5,000 in death duty. Selling it at €150,000 would incur a further €6,000 at 12% on the profit.

So does removing the death duty make it even better for heirs who evade capital gains? Another notary said that everyone is still in the dark about what happens if the causa mortis has been abolished: "If death duty is removed, will heirs have to pay 12% on the final sale value? It will hardly benefit them. I spoke to some sources at inland revenue and they are clueless about the system."

This question mark is what many potential heirs should be asking themselves before rushing to any conclusions - paying the 12% tax on the final sale value of a €150,000 property comes in at €18,000. Taking the logic to the extreme, this move could encourage the under-declaration of property values.

What is questionable is the electoral interest that informs the abolition of death duty. With an annual €10.7 million paid into the state's coffers from death and donation duty, was this the price to be paid to placate voters on election eve?

Inheritance tax, even at a meagre 5%, is arguably a just tax: its proper redistribution should ideally address economic and social inequalities, and not to simply raise government revenue.

Families that own property and work hard for what they have want their children to enjoy their success. But the luck of being born to the 'right' family is so random, why should anyone benefit from it? Labour - one MP told MaltaToday - will keep the good stuff of Fenech's budget if elected in 2013. It still beckons the question as to why such an expensive electoral ploy is not questioned a bit more thoroughly.