Britain is one of only three European countries where inheritance tax rates run as high as 40%. That’s one of the more intriguing gems to emerge from a recent report from Julius Baer, which forms part of the bank’s Wealth Report: Europe publication. (In case you’re wondering, the other two are France and Spain.) Sweden, Austria and Cyprus, by comparison, have all abolished inheritance tax completely.
The Growing Importance of Inherited Wealth in Europe, by Julius Baer’s investment specialist Robert Ruttmann, says that the steady diminution of IHT across Europe is likely to mean that inherited wealth will play a much bigger role in investment markets during the coming decades.
“Whereas rates of inheritance tax in the first half of the 20th century were constantly increased in order to cover the costs of war, the second half of the century saw a reversal in this trend. Lower inheritance tax rates and higher capital returns mean that the importance of inherited wealth is likely to grow in Europe in future.”
Ruttmann quotes extensively from Thomas Piketty’s 2014 book Capital in the Twenty-First Century, which compiles ground-breaking data on the causes of economic inequality. But unlike Piketty, who favours the reintroduction of high taxes as a social and economic leveller, Ruttmann is carefully neutral on the prospects for a society where inherited wealth is gaining traction.
He weighs up the pros and cons carefully.
“For instance, on the one hand, an inheritance may motivate people to take their own measures so as to preserve wealth across future generations. Family-owned businesses, for example, are a widely used instrument for building up and preserving a family’s wealth following the death of the founder.”
“On the other hand, the prospect of a considerable inheritance may also have a negative impact on the personal motivation of heirs. This phenomenon is termed the ‘Buddenbrooks effect’ after the acclaimed novel by Thomas Mann, which chronicles the gradual decline of a merchant family over the course of three generations.
One consequence of this effect is that more and more wealthy individuals would transfer much of their wealth to foundations. Accordingly, many billionaires have already signed the ‘Giving Pledge’1 campaign, set up by Warren Buffett and Bill Gates, which calls on the world’s wealthiest families to dedicate the majority of their wealth to philanthropy.”