Estate Duty, if reintroduced, will hurt the upper middle-income earners more than the rich

TL;DR – It was abolished in 2008. 

With Budget 2018 approaching, speculation has been rife over the topic of taxes.

In last year’s Budget, Finance Minister Heng Swee Keat has said that the Government must introduce new taxes or raise taxes to fund rising expenditure on healthcare and infrastructure in Singapore.

Many expect the goods and service tax (GST) to go up since the last increase was 12 years ago.

There has also been some discussions over the introduction of capital gains tax and the re-introduction of estate duty.

What is Estate Duty?

Estate Duty was abolished in 2008 by then Finance Minister Tharman Shamugaratnam as they wanted to make Singapore an attractive place for the rich and promote Singapore as a wealth management hub.

According to DPM Tharman, average Singaporeans who have worked hard to pay income tax and property tax, would be able to pass on their savings to the next generation without much worry.

Before 2008, the bulk of wealth consisted of land that was passed down to younger generations and estate duty was a way to re-calibrate opportunities for each new generation. It would also prevent wealth from being accumulated in fewer and fewer hands over time.

Estate Duty was charged based on 5% for the first $12 million of dutiable assets and 10% thereafter.

When it was still in force, the Government only collected an average of $75 million a year from Estate Duty.

That was about 0.6 per cent of Government revenue between 2003 and 2007.

It’s pretty little given that the ERP system collects at least $150 million in revenue each year! Considering that this sum of $150 million was last recorded in 2012 – this figure would have increased since then.

Estate Duty affects ordinary Singaporeans

Some economists may argue that Estate Duty could potentially contribute more since Singapore is facing an ageing population and property prices have shot up in the last 20 years.

However, if it’s re-introduced, it will definitely affect the middle and upper-middle-income Singaporeans.

These include mature Singaporeans with elderly parents who may have bought several properties many years ago and the houses are currently valued at several fold more than the original cost.

Also, since Estate Duty is a tax on the overall market value of a person’s assets (cash and non-cash), the taxable amount doesn’t just include immovable property (land and buildings).

It also includes cash savings, public listed shares and items in safe deposit box.

Assuming the estate of a deceased person is worth $15 million, the assets would be subject to $900,000 of Estate Duty! That could be some 37.5 years of saving for an average Singapore who saves $24,000 in a year.

Estate Duty can be easily circumvented

The Government removed Estate Duty to encourage more locals and foreign investors to hold their assets in Singapore.

Even if they didn’t abolish it in 2008, the wealthy ones can easily “move” their assets overseas to avoid being subject to estate taxes.

They could invest their money in overseas properties since immovable property outside Singapore is not subject to Estate Duty in Singapore.

Similarly, they could transmit huge amounts of monies to overseas bank accounts.

Some businessmen also establish trust funds to override Estate Duty.

For people with high net worth, setting up trust funds do not cost a lot for them.

It typically costs around $1,000 to $4,500. There is also an annual management fee.

Ways to tax on wealth

Though Estate Duty has been abolished, there are still ways to tax on wealth.

Property tax is a wealth tax which you have to pay for holding property and it’s an efficient tax because the tax rates for owner-occupied homes are much lower.

That means, for average Singaporeans who only own and live in a HDB flat, pay a minimal cost (see the table below) compared to those who own several properties.

Owner-occupier:

Basically, property tax affects wealthier ones compared to middle and upper-middle-income earners because they own a few properties without residing themselves (see the table below).

Own properties but do not live in them:

The tax rates are much higher for people who do not reside in their property.

Also, the higher the value of the property means the higher the annual value. This would lead to a higher tax rate.

To give an example, a person who can afford a Sentosa Cove property at $17 million will have to pay approximately $45,287 of property tax a year.

What do you think? Estate Duty or Property Tax?

If you’re interested to read what DPM Tharman had to say about abolishing Estate Duty in 2008, you can check out his then Budget speech here.