During a recent debate on the President’s Address, the topic of wealth taxes has once again been raised for discussion in Parliament, two months after Deputy Prime Minister Lawrence Wong made the decision to increase buyer’s stamp duty for higher-value properties and vehicle taxes for luxurious cars. Specifically, a Nominated Member of Parliament NMP) mooted the idea of a “limited inheritance tax”.
Budget 2023 was surprisingly silent on whether estate duty or inheritance tax will be introduced, given the intense discussion leading to the Budget 2023 Statement and the government’s previous statement that it will continue to study how it can expand the current wealth tax system.
To set the record straight, the Singapore government has always been collecting wealth taxes to complement our taxes on income and consumption. Wealth taxes do come in different forms though, and based on the efficiency and simplicity, the government has opted for the low-hanging fruit – relying on real-estate taxes such as property tax and property stamp duty.
So why is it so difficult to make a decisive statement on the fate of inheritance tax?
Proponents of inheritance tax have alluded to its many merits. It has been described as “the most moral of taxes”. It is in line with our beliefs in a meritocratic society as it prevents wealth from being accumulated in fewer people over time by rebalancing opportunities with each new generation.
We want our citizens to succeed in life through sheer hard work and not because they have inherited huge wealth and a great head start in life. In principle, inheritance tax targets the wealthy. More importantly, it potentially plays a critical role in addressing wealth disparity, leading to a more inclusive and progressive society.
While these points are generally still valid today, the inheritance tax has many shortcomings which led to its removal in Singapore in 2008, following the footsteps of jurisdictions 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.
Besides the above reason, the ultra-rich can easily avoid inheritance tax through tax planning, for example by gifting big-ticket items such as properties to the next generation during their lifetime. As a result, the eventual annual paltry tax collection of about $75 million 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.
These factors favouring the removal of inheritance tax are still valid today. Our entrenched position as a wealth management hub in the region will be seriously threatened if the inheritance tax is re-introduced. 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 citizens may be enticed to relocate if that can save them from such a high tax burden. Similarly, the 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. However, these moves may dilute our attractiveness as a wealth management hub.
Measured against the above factors, the suggestion by the NMP of a limited inheritance tax levied only on inherited properties above $5 million may be worth considering. On the one hand, it targets the ultra-rich and leaves the sandwiched middle-class citizens out.
On the other hand, it may be harder to avoid paying such taxes if certain anti-abuse rules are put in place. 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 at least, it is a closer step to a meritocratic and inclusive society that seeks to narrow the widening wealth disparity.
The article is an edited version of the first one published in CNA.