Axing Death Tax A Boon To The Middle Class

Source : The Straits Times, Feb 21, 2008
A SINGAPORE manufacturer did his sums after Finance Minister Tharman Shanmugaratnam scrapped estate duty last Friday.

He was surprised to discover that his family would save at least $200,000, based on his assets of a terrace house, cash in the bank, Central Provident Fund (CPF) savings, shares and his stake in the company.

‘I didn’t know it would have cost me so much,’ said the 57-year-old, who put his net worth at about $6 million. He spoke to The Straits Times on condition that he would not be named.

‘But you can’t tailor your life to avoid estate duty. I focus on my business and how to make a profit.’

Last Friday, that death tax - known as estate duty - a legacy of the British colonial administration, was laid to rest when Mr Tharman announced its demise in Parliament.

Estate duty kicked in when a person died and left assets worth over a certain threshold. Most people thought it affected only the very rich.

In fact, with rising affluence, a growing number of middle- and upper-middle income earners were also liable.

Many had accumulated more than $600,000 of assets in cash, shares and other such assets in their lifetime, said KPMG tax services executive director Ooi Boon Jin.

‘If you had CPF savings of up to $600,000 already, and if you had $700,000 of cash and shares outside CPF, that entire $700,000 was technically subject to estate duty,’ he said. ‘It was a significant ‘cost of death’ and did not affect very rich people only.’

Indeed, tax experts say the abolition of estate duty will benefit the middle class in particular. Unlike the very rich, this group may not have had the resources to set up trusts and other legal arrangements that would have enabled them to sidestep death duty.

Mr Dennis Khoo, general manager of Standard Chartered’s wealth-management division, said many rich people minimised death duty by holding more assets in residential property - rather than stocks, cash and insurance.

Estate-duty rules tended to encourage people to channel money into property because it had a much higher exemption threshold than other assets.

Those wealthy enough were also advised to set up a trust, a legal arrangement enabling them to give away their assets, such as shares and property , to named beneficiaries. A trustee, typically an institution, administers the trust. A very basic trust to hold as little as $50,000 cost $3,000 to $5,000 to set up, with an annual fee of about $1,000 to $2,000.

‘It is true that there were mechanisms for minimising or avoiding estate duty, but these were the domain of the wealthy end of the scale as they could involve quite complex and expensive arrangements,’ said PricewaterhouseCoopers tax partner David Sandison.

On a broader level, one of the more significant impacts of scrapping the death tax is that it may attract new wealth. Well-heeled families may be encouraged to live in Singapore permanently and keep their assets here.

The Government stands to lose about $75 million a year from estate duty. ‘But it’s not a huge loss to the Budget,’ said chief executive of LGT Bank in Liechtenstein (Singapore), Mr Rolf Gerber.

The pros outweigh the cons, he said.

Doing away with estate duty, he explained, will encourage wealthy foreigners to move here as they will not face the ‘added layer’ of cost of death duty. Long-time rival wealth centre Hong Kong did away with its death tax three years ago, he said.

Dr Francois Monnet, Credit Suisse’s head of private banking in South-east Asia and Australasia, also expects that wealthy individuals will be encouraged to move their wealth here and take up permanent residence.

Countries such as Britain, Japan and South Korea still have estate duties, whereas Malaysia and Australia have abolished theirs.

Mr Michael Troth, head of global wealth structuring (Asia-Pacific) at Citi Global Wealth Management, said scrapping the tax removed a negative perception about Singapore.

‘Prior to last Friday, it was felt that as Hong Kong had abolished its estate tax a couple of years ago, somehow it must be more attractive to invest there than in Singapore,’ he said.

‘By abolishing estate duty in Singapore there is no issue any more, either perceived or actual, and Hong Kong and Singapore are on a level playing field as far as estate tax is concerned.’

There is another potential boon. Private bankers hope wealthy people spared the death tax will be encouraged to give back more to society.

‘It will be great to see new names and new donors enter the fray of giving, especially the new rich and also rich immigrants,’ said Ms Tan Su Shan, managing director and head of Singapore, Malaysia and Brunei for Citi Private Bank.

Still, the smart money believes that in order to attract more assets to Singapore, other measures are needed too.

Abolishing estate duty alone is unlikely to attract a ‘tidal wave’ of assets to the wealth-management industry here, said UBS Wealth Management’s wealth-planning consultant, Mr Bill Lexmond.

He singled out the issue of the taxing of Singapore-based and managed assets. Now, there is an incentive for assets to be held outside Singapore as individuals here have a ‘blanket exemption’ from taxes on all foreign-sourced income, while only certain Singapore-sourced income is tax exempt, he said.

Mr Lexmond believes the Family-Owned Investment Holding Company Investment Scheme, a proposed new incentive aimed at attracting assets to Singapore, due to be unveiled by May by the Monetary Authority of Singapore, must be broad enough to address this.

‘This incentive should apply to all returns from investments for qualifying family-owned investment holding companies,’ he said.

What estate duty entailed

THE first $9 million of residential property and the first $600,000 of all other assets, including Central Provident Fund savings were exempt from the now-abolished estate duty.

Amounts above those thresholds attracted the duty. The rate was 5 per cent of the first $12 million and 10 per cent of anything above that.

Estate duty had to be paid within the first six months after a person’s death or penalties and interest applied.

The amount of estate duties collected for financial year 2007 was about $147 million, according to the Ministry of Finance.