The concept of an inheritance tax is certainly not something new. In fact, it dates back as far as the sixth year BCE, when the Vicesima heraditatum was imposed by the Roman Emperor Augustus. The fact that the tax has been around for such a long time should be seen as an endorsement for its utility and effectiveness. In simple terms, it allows someone who will no longer be able to enjoy their fortune to pass it to someone else. This fortune was probably the result of hard work throughout a person's entire lifespan, not just by that one person but by their surrounding support network as well, which may include family or friends. No one accumulates or enjoys wealth on their own, and that is why most people will decide to pass it on after their death. Economic growth works multilaterally, and taxes recognise this truth.
Despite this, a tax on inheritance has never been popular, and tax planning has become common practice worldwide. In Chile, the inheritance tax is ruled under Law Nº16,271. Its main features are:
- It is a progressive tax. This means that as the amount received by each beneficiary increases, the tax rate will also increase.
- There is a tax-free threshold, allowing the initial amount received by a beneficiary to be exempt from tax.
- Distant relatives are taxed differently than closer family members.
In Chile, the practical effect of its progressive nature means it is only really targeted at bigger inhertiances, so most people will not be affected by the tax. Smaller inheritance amounts will be either completely tax free or taxed at a lower rate. On the other hand, beneficiaries of large amounts over USD $1,000,000 may have an incentive to search for tax alternatives to ensure a better final outcome. Such practice should be carefully planned out and designed, and only with expert advice, particularly in light of the anti-avoidance rules (GAAR) in force since 2015.
While so far the inheritance tax has remained out of the political discussion, this does not mean it is completely exempt from controversy. Many experts will argue that the inheritance tax is actually an example of double taxation. In legal terms, double taxation occurs when the same person is taxed multiple times on the same tax and basis. In our opinion, legally speaking, there is no double taxation with the inheritance tax. This is because the same person is not getting taxed multiple times for the same thing—the deceased person's estate is taxed throughout his or her life. When the estate passes on to a beneficiary, it is then taxed by the inheritance tax. It is the increase in income earned by the beneficiary that is being taxed, and not the deceased person. While from an economic perspective, it is the same amount being taxed again, it must be kept in mind that legally speaking this is not the case.
The same concept and distinction can be seen frequently in day-to-day life. A good comparison is when someone receives his or her salary. This person will first pay their income / payroll tax. They will then buy groceries and other goods and pay the VAT (or GST in other jurisdictions). They may eventually purchase a house where they will pay stamp duty on this property. They may even start a business and pay a business licence (patente municipal). There could be any given number of future taxes that could be paid depending on the complexity of a country's tax system. In legal terms, the taxes are for different reasons, and so someone will keep getting taxed over and over again (for different reasons).
Applying this example to the inheritance tax, it is a new person being taxed, and for this reason, it is not double taxation. What would be classed as double taxation in a legal sense is what is known as "juridical double taxation", which is where the same income is taxed for the same reason and during the same period, to the same person. In our opinion, when one questions the idea of an inheritance tax, it should be reminded that everyone should contribute their fair share to a community.
Tax is admittedly not everyone's favourite topic, but it is an important aspect of everyone's lives. Especially in regards to the inheritance tax, a little bit of planning now could potentially have a big impact on your loved ones when the time comes for them to inherit your estate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.