Re-Considering the Merits of a Limited Inheritance Tax in Singapore
Key Highlights :
The idea of a “limited inheritance tax” on multi-million-dollar inherited property with some rules to prevent abuse could be worth considering, 15 years after Singapore removed it, says NUS Business School professor Simon Poh. Singapore seems to be doubling down on wealth taxes, with a new round of property cooling measures that apply from Thursday (Apr 27). Additional buyer’s stamp duty will be increased from 30 per cent to 60 per cent for foreigners buying any residential property, from 17 per cent to 20 per cent for Singaporeans buying a second residential property and from 25 per cent to 30 per cent for Singaporeans buying their third and subsequent residential property.
During the debate earlier in April on the President’s Address, which laid out key priorities for the remainder of the current term of parliament, Nominated Member of Parliament Raj Joshua Thomas also mooted the idea of a “limited inheritance tax” for inherited properties that have a value of S$5 million (US$3.7 million) and more. This comes two months after Deputy Prime Minister and Finance Minister Lawrence Wong announced an increase in buyer’s stamp duty for higher-value properties and vehicle taxes for luxury cars. But Budget 2023 was surprisingly silent on whether estate duty or inheritance tax will be introduced.
To set the record straight, the Singapore government has always been collecting some form of wealth taxes to complement taxes on income and consumption. On the basis of efficiency and simplicity, the government has so far opted for low-hanging fruit like property tax and stamp duty.
Proponents of inheritance tax have alluded to its many merits. It has been described as “the most moral of taxes” and is in line with our beliefs in a meritocratic society. It prevents wealth from being accumulated in fewer people over time and rebalances opportunities to demonstrate skill and effort with each new generation, not just entrench a great head start in life. In principle, inheritance tax targets the wealthy. So importantly, it potentially plays a critical role in addressing wealth disparity, leading to a more inclusive and progressive society.
But inheritance tax has its shortcomings, which led to Singapore removing it in 2008, following the footsteps of places like Hong Kong and Malaysia. Removing the inheritance tax paves the way for wealthy individuals from all over Asia and the region to move their assets to Singapore, contributing to vibrant and high growth in our wealth management industry. This would not have been possible if we were to retain the inheritance tax when our close competitors like Hong Kong had chosen to abolish it.
In practice, an inheritance tax can end up a cat-and-mouse game. The ultra-rich can easily avoid inheritance tax through tax planning, for example by gifting properties to the next generation during their lifetime. As a result, the eventual annual tax collected from estate duty was only about S$75 million on average, according the 2008 Budget statement. This makes it an unsustainable source of tax revenue for the government to rely on, when compared to the resources that must be mobilised to collect this tax.
The likelihood of the exodus of funds and assets out of Singapore to other countries with no inheritance tax is high. Worse still, some of our wealthy residents may be enticed to relocate if that can save them from such a high tax burden. Consequently, more tax revenue could potentially be lost if we take into account the Goods and Services Tax (GST) on the big-ticket items they may otherwise have purchased or the income tax payable by their family members who derive employment or trading income. Such capital flight means tax collection will continue to be low unless the taxes are tweaked to make it more progressive, with much higher tax rates and lower exemption values at the risk of diluting our attractiveness as a wealth management hub.
Measured against the above factors, the suggestion of a limited inheritance tax levied only on inherited properties above a defined high value, say S$10 million for a lower-end good class bungalow may be worth considering. Setting the bar sufficiently high can target the ultra-rich, well clear of the middle-class segment or those who may inherit property from asset-rich cash-poor parents. It is also possible to make it harder to cross the thin line between tax planning and tax avoidance by installing certain anti-abuse rules. For example, previous rules allowing the making of gifts to circumvent the collection of inheritance tax could be tweaked to nullify such actions.
Of course, previous unrealistic low exemption limits for non-residential assets as well as unrealistic high exemption limits for residential properties will have to be re-looked and revised to make the system less favourable to ultra-rich individuals as compared to upper- and middle-income individuals. It may well be that the tax revenue collected from this limited inheritance can still be on the low side, compared to those generated by property stamp duties, including additional buyer’s stamp duties, for residential properties. But it would have the added benefit of taking Singapore a step closer to a meritocratic and inclusive society that seeks to tackle inequality.
