Inheritance Tax: Will It Be Reintroduced In Malaysia And How To Avoid It
Published on 20 April 2020 by Ang Wei Hong
Inheritance tax is a form of tax that is imposed by the government on those who inherit assets from the estate of a deceased person. Put it simply, when you inherit any kind of property, be it movable or immovable, you will need to pay a certain amount to the government based on the value of your property. In some countries, it is also known as “death duty” or “estate duty”.
There are a few reasons for the imposition of this tax in a country. Any kind of tax provides revenue for the government and is also a good source of income for a country, including inheritance tax. It also acts as a mechanism to reduce inequalities of wealth in a country as it helps the government to reduce the income disparity and reduce the wealth gap between the rich and the poor. Usually it would only affect those who are rich because the inheritance tax is imposed on high values of estates.
The Position of The Law in Malaysia
An inheritance tax was implemented in Malaysia (then Malaya) under the Estate Duty Enactment 1941. Section 4(i) of the Enactment provides that estate duty is imposed on properties which passes on the death of the deceased. It reads as follows:-
“In the case of every person dying after the commencement of this Enactment, there shall, save as hereinafter expressly provided, be levied and paid upon the principal value, ascertained as hereinafter provided, of all property settled or not settled which passes on the death of such person a duty called 'estate duty' at the graduated rates set forth in the First Schedule to this Enactment.”
According to the Enactment in 1941, there were 28 tax brackets with scale rates from 0% to 40%. The highest tax rate applies to property with value over RM5,000,000.00. Since then, there were 6 reforms to that enactment. Effective from 1984, there were only 3 tax brackets with the scale rates of 0%, 0.5% & 10%. There would be 0% tax on properties with value under RM2,000,000.00 and the highest rate, which was 10%, would be applicable to properties with value of more than RM4,000,000.00.
The Estate Duty Enactment 1941 was repealed on 1 November 1991 by the Finance Act 1992. However, it was clearly stated under Section 46(2) that the repeal of the laws shall not affect the operation of such laws in regard to any person demised before the coming into force of the repeal of such laws as if the repeal had not been made.
Therefore, the estate duty is still applicable for deaths before 1 November 1991.
Currently, there is no tax of any kind for property inheritance in Malaysia. However, judging from the weakening economic situation due to the outbreak of Covid-19, there is a possibility that it will be reintroduced in Malaysia as it could be a good source of income for the country.
The Position of The Law in Other Countries
If your children have migrated to other countries and are no longer Malaysian citizens, they might be liable to pay inheritance tax if the countries which they migrated to would impose inheritance tax. Therefore, we are here to give a little insight on the position of the law in other countries.
There is a £325,000.00 threshold in the United Kingdom. If your property is below the threshold, there will be no inheritance tax. If the property is above the threshold, there will be no inheritance tax if you leave it to your spouse, civil partner or a community amateur sports club. If you are leaving property to your children (including adopted, foster or stepchildren), your threshold can increase up to £500,000.00. If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means your partner’s threshold can be as much as £1 million.
There used to be inheritance tax in Singapore but it was abolished by the government. According to Section 2A of the Estate Duty Act inheritance tax is only applicable to persons who died before 15 February 2008. This simply means that the estate of any person who died on or after 15 February 2008 does not have to have inheritance tax imposed.
In Australia, inheritance tax is known as death duties. Currently, there is no inheritance tax in Australia. It was abolished by the Australian Government in 1979 following the lead of the Queensland Government led by Joh Bjelke-Petersen. However, assets acquired from the estate may become subject to Capital Gains Tax
Ways to Avoid Inheritance Tax
(a) Inter Vivos / Love and Affection Transfer:
One of the easiest ways to avoid the inheritance tax is to transfer the property to your children either by way of love and affection or inter vivos. Essentially, both of these methods have the effect of transferring the property to your children as a gift when you are still alive.
Section 2 of Stamp Duty (Remission) (No. 2) Order 2019 (P.U. (A) 369) which came into operation on 1 January 2020 specifically states that 50% of the Stamp Duty chargeable on any instrument of transfer of any immovable property operating as a voluntary disposition inter vivos from parents to children is remitted.
Therefore, by doing so, you would be exempted from the inheritance tax and also could enjoy a 50% exemption (discount) on the stamp duty.
However, by doing so, there is a risk of mismanagement of the assets by the children and also the risk of losing the asset as the spouse of the children will have a share to the assets in the event of divorce/demise of the children.
(b) Trust Arrangement
The other way to circumvent a hefty inheritance tax is to appoint the children as trustees to hold the property on behalf of the parents and at the same time enter into a Power of Attorney agreement with the children to appoint them as the Attorney of your property to allow them to deal with the properties. This way, the parents could remain as the beneficiary owners of the property and the children although not the legal owner to the property can still deal with the property, i.e. to sell or to collect rental.
The downside to this method is that if the children passed away before the property is sold off, the property will fall back to the estate and the inheritance tax still kicks in when the grandchildren or other successors inherit the property.
(C) Setting Up A Trust Fund for The Family
A trust fund is very similar to a will except that it provides for more control and tax benefits than a will does. It is an estate planning tool that establishes a legal entity to hold property or assets for a person or organization, managed by a trustee who is a neutral third party. Unlike a will, trusts are not subject to probate and all the legal procedures. Since the assets in the trust fund belongs to the trustees and not the grantors, when the trustees pass the assets on to the grantors’ chosen beneficiaries, they will not be subject to any inheritance tax because technically they are not inheriting any assets from the grantors.
In a nutshell, at the time of this article there is no inheritance tax in Malaysia. However, due to the recent outbreak of the Covid-19 virus, there is no definite answer as to whether or not it will be re-introduced. Hence, we should always hope for the best and prepare for the worst. It is important that we understand and know the ways to get around it. Further, at this crucial moment, it is important to appreciate the importance of estate planning and also to consider all the consequences and the legal effects in estate planning.
The contents of this article are not intended to constitute legal advice on any specific matter and should not be relied upon as a substitute for specific legal advice on matters or transactions.
For further information and advice on the article above or any areas of corporate and conveyancing, you may contact any of our corporate and conveyancing lawyers.