Should inheritance taxes be increased or reduced?

Since the end of the 1960s, the income from inheritance taxes has been in sharp decline in most countries of the Organization for Economic Co-operation and Development (OECD), due to a reduction in the applicable scales and an increase in exemption schemes for certain property assets: main residence, professional property and life insurance in particular.

Twelve countries have simply abolished them, with Norway and the Czech Republic being the latest countries to have taken the plunge, in 2014. With inheritance taxes representing 13.6% of compulsory deductions in 2023 – their revenues having more than doubled since 2011 – France is an exception. It ranks first among OECD countries for the weight of free transfer taxes in gross domestic product (GDP), notes the Court of Auditors in a report on inheritance taxes published in September 2024.

Regularly, the question of reforming inheritance taxes comes to the forefront. Many avenues are mentioned… which do not all go in the same direction. Some recommend a global reduction in inheritance tax to reduce the burden of wealth taxation in France. France is the country in the European Union with the highest rate, with wealth taxes representing 4.1% of GDP in 2022, “far ahead of Belgium (3.4%) and Greece (3%), the European Union posting an average of 2.1%”according to the Court of Auditors.

Take into account societal developments

Others advocate more targeted relief. With the aim of reducing the cost of collateral line inheritances, which are more heavily taxed than direct line inheritances (30% on average for inheritances between brothers and sisters compared to 8% for inheritances between parents and children), but also to take into account societal developments, in particular family reconstitutions. Because if, in the current state of the law, the children of the spouse are not entitled to inherit from their mother-in-law or their father-in-law, nothing prohibits granting them a donation or drawing up a will in their name. favor. But in the absence of a family relationship, free transfer rights are calculated at a rate of 60%, after a reduction of 1,594 euros applicable only in the event of inheritance.

“In this sense, as part of the finance bill for 2025, the finance committee of the National Assembly recently supported an amendment which doubles the amount of reductions enjoyed by nephews and nieces and creates a new reduction of 31 865 euros for donations in favor of the spouse's children. To finance this measure, the last tranche of the direct line inheritance tax scale would be increased from 45% to 49% for inheritances exceeding 3.6 million euros.explains Mathieu Le Tacon, associate lawyer at Delsol Avocats.

Other avenues for reform – notably those which were developed by the Economic Analysis Council (CAE) in December 2021, and recently taken up by Oxfam France – propose on the contrary to reform inheritance taxes to make them more progressive. Not by suggesting a further increase in the scale, which already displays high tax rates in international comparison (45% above 1.8 million euros for direct line inheritances), but by removing or adjusting certain Favorable measures which mainly benefit the highest assets and contribute to undermining the progressiveness of the tax.

Erasure strategy

First device incriminated which is not based on a “strong economic justification” and whose cost in terms of public finances is of the order of 2 to 3 billion euros per year according to the CAE: bare ownership donations. With this type of donation, to the extent that the donor retains the usufruct, that is to say the right to use the property and/or the income it provides until the end of his life, the rights to pay are calculated solely on the value of the bare ownership transferred, by definition lower than that of full ownership. This value is set based on a scale which depends on the age of the donor at the time they transmit, and therefore on their life expectancy. The younger he is, the lower it is.

For example, the transfer to a child of a fully owned building worth 1 million euros results in the payment of gift or inheritance tax of 212,962 euros, i.e. an effective tax rate of 21%. . In the case of a bare ownership donation, these rights are reduced to 122,962 euros if the donor is between 71 and 80 years old (effective rate: 12.3%). This amount drops to 98,194 euros if he is between 61 and 70 years old (effective rate: 9.8%). On the death of the donor, the bare owner recovers full ownership of the property, without additional rights to pay on the usufruct. The icing on the cake: if the property has increased in value in the meantime, the added value also escapes any taxation. In other words, if on the day of death the building is worth 1.2 million, the additional 200,000 euros will never be taxed.

This strategy of erasing capital gains is not specific to donations of bare ownership, but to all transfers free of charge (donations and inheritances), because only transfers for consideration result in the taxation of the most -values. Consequence? “It is therefore possible to pass on property from generation to generation without ever having to pay capital gains tax, even if the donee subsequently transfers the asset”notes the CAE. To do this, it is sufficient for the property to be resold at the same price as that mentioned in the deed of donation or the declaration of inheritance.

Life insurance is also one of the measures in the crosshairs of supporters of better progressivity of the inheritance tax. Its tax system is complex: sometimes the sums paid are completely exempt, sometimes they are taxed at a flat rate (20% or 31%), regardless of the relationship between the insured and the beneficiary of the capital, or subject to the inheritance tax. It all depends on the date the contract was opened (before or after November 20, 1991), the date of payment of the “premiums” (before or after October 13, 1998) and the age of the insured at the time of their payment (more or less than 70 years old). But, in practice, this system now makes it possible to transmit up to 152,500 euros duty-free to as many beneficiaries as you want – including people with no family ties –, provided you fund your contract before his 70th birthday.