Inheritance Tax in Malaysia

This post focuses on taxing wealth particularly generational transfer of wealth via inheritance tax.

"Without the estate tax, you will in effect have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit" -Warren Buffet-

"Abolishing estate taxes would remove one of the main incentives for charitable giving" -George Soros-

"..great sums bequeathed oftener work more for the injury than for the good of the recipients. Wise men will soon conclude that, for the best interests of the members of their families and of the state, such bequests are an improper use of their means", Andrew Carnigie

Wealth inequality is a lot of worst than Income Inequality. One of the most powerful tools to tackle wealth inequality is through taxes.

Besides direct annual wealth taxes, other ways of taxing wealth is by taxing the capital income generated by that wealth , and its transfer between generation. The earlier is capital gain tax while the later is inheritance tax

 According to The Edge dated Sept 18 2017, inheritance tax is usually found in developed nations.

Source : The Edge, Sept 18th 2017

Not many people know that Malaysia used to have an inheritance tax. It was abolished by the BN government 26 years ago or in 1991. Perhaps it has to do with the prevailing Thatcher-Reagan doctrine at that time which called for limited taxes on the rich. Or perhaps it has to do with the unprecedented crony capitalism class that is about to emerge.

But the official narrative was that only a few actually paid inheritance tax, therefore the collection was low. However, Jomo K.S & Wee Chong Hui in Malaysia@50 argued that there wasn't a need to abolish it since the administrative mechanisms & arrangement had long existed , therefore no additional burden if the estate duty continued.

Inheritance tax in Malaysia was known as estate duty back then. It was levied on transfer of property from deceased person to beneficiary. Prior to 1984, estate duties of 12-45% were levied on property with a minimum value of RM100k for deaths in Malaysia & 5-60% on property with minimum value of RM40k for deaths outside Malaysia. (Jomo KS et al 2014)

After 1984, that threshold was increased to RM2 million for deaths in Malaysia & RM500k for deaths outside Malaysia while the rates were reduced to 5-10%. Basically it was charged at a scaled rate of 0%, 5% & 10%. The highest rate 10% was applicable to estates valued at RM4million & above. (Jomo KS et al 2014 ; Esther Lee 2017)

When it was abolished in 1991, the gross monthly household income was RM1563. Which means beneficiaries earned an amount equivalent to 106 years & 53 years of wealth tax free.( Jomo KS 2014)

In fact , before it was abolished, estate duty collection prior to its repeal in 1991 peaked at RM40million which in today's term could amount to almost RM150 million at 5% inflation rate. (Estimated tax revenue for Malaysia in 2018 is RM240billion)

Evidently, revenue from inheritance tax is not as large as some would think. In fact , estate tax in the USA brought in less than 1% of tax revenue. However , the point of inheritance tax is about equity & redistribution & not so much of trying to raise revenue for government.

Since we already have real property gain tax, it seems natural to extend RPGT to include property inheritance tax regime. This is because inheritance tax is basically taxing unrealized capital gain on those property when the aforementioned property changes hands between generation.

Currently, transfer as gift betwn family members is exempted from RPGT under schedule 4 of RPGT Act 1976. Besides that RPGT rate for properties held beyond 5 years is 0% for Malaysian citizens.

Hence, property inheritance tax is needed to compliment the existing real property gain tax. Maybe similiar one time exemption from RPGT can be extended to Property Inheritance tax. Indeed, even OECD acknowledge property related taxes as the more growth friendly taxes.

But to have a broader estate tax that goes beyond real property scope in RPGT would require greater level of public discourse. Esp so in the absence of capital gain tax(except property). Example of a broader estate tax is UK's estate tax.

This is important as property doesn't form bulk of wealth for the super rich. Therefore inheritance tax limited to property doesn't reach the super rich wealth effectively.

Reference :
1) Malaysia@50: Economic Development, Distribution & Disparities by Jomo KS & Wee Choong Hui
2) Game Changer & Whistle blowers : Taxing Wealth by James Brumby & Michael Keen
3) Question of inheritance tax resurfaces in Malaysia by Ester Lee published in The Edge dated 18th September 2017