What countries are the best and worst places to inherit a family business?

Spain and Belgium have the two highest inheritance tax rates in the world for family businesses      Photo: Pixabay
Spain and Belgium have the two highest inheritance tax rates in the world for family businesses      Photo: Pixabay

Spain and Belgium have the highest inheritance tax rates for family business owners in the world, which is also stifling entrepreneurial activity in these countries, according to a new report.

The two European countries have a maximum inheritance tax rate of 81.6% (Spain) and 80% (Belgium), which compares with 60% in France, and 40% in the UK and the US. Italy and Brazil have among the lowest maximum inheritance rates in the world, as low as 8%.

The study, entitled Global Family Business Monitor 2017, compare 69 different countries’ inheritance rules with regard to family business succession to identify the economies that offer the best conditions for family business transfer. “This survey is exceptional,” says Marnix van Rij, EY global leader of personal tax services. “The analysis contains new and unexpected insights into global inheritance taxes and their impact on family businesses.”

One of those unexpected insights is how much tax exemptions and loopholes can bring down the maximum inheritance tax levels. So, even though the maximum inheritance tax in Spain is a very high 81%, the actual rate after all the exemptions and loopholes can fall to just over 40%. In the UK, it can actually fall to zero, despite having a maximum rate of 40%.

“The differences between the maximum rate of inheritance and what family businesses end up paying can in many cases be very wide,” says Thomas Zellweger, one of the authors of the report and a professor of management at the University of St Gallen. “The report underlines how complicated tax can be when it comes to family business succession and inheritance.”

Many countries where the maximum inheritance tax level was high, even after exemptions, also scored low in terms of entrepreneurial activity, the report found. So, for example, Spain and Belgium have a Total Early-Stage Entrepreneurial Activity (TEA) rate of just 5%, whereas the US has a TEA rate of 14%. Although the negative correlation between inheritance tax and entrepreneurial activity wasn’t always found. Italy has a very low maximum inheritance tax level, but a TEA rate of less than 5%.

The report also looked at wealth inequality and inheritance tax rates, and found that the correlation between inequality and tax rates is negative. So countries with a high GINI-index number tend to have lower inheritance taxes.