The recent furore generated by the tax reform bills sponsored by the Tinubu administration has brought to light the urgent need to reevaluate the entire concept of taxation in Nigeria. This article will delve into an often-overlooked aspect of taxation: taxing residual wealth from generation to generation. It will underscore the pressing need for Nigeria to adopt inheritance taxation as part of ongoing tax reforms and draw comparisons with inheritance tax structures in the UK, the US and South Africa. These comparisons will underscore the potential positive impacts of inheritance taxes in fostering equity, funding development, and closing the wealth gap in Nigeria. As Nigeria grapples with economic challenges, rising inequality, and the need for sustainable public revenue, the reinstatement of the scrapped Capital Transfer Tax (CTT) emerges as an urgent and compelling solution.
In Nigeria, the top 10% of the population holds almost 30% of the nation’s income. This figure has remained trended upward in recent years, indicating a significant income concentration among the population’s wealthiest segment. To put this into perspective, the income inequality ratio between the top 10% and the bottom 50% is 1 to 14. This means that, on average, an individual in the top 10% earns 14 times more than someone in the bottom 50%.
The Historical Context of Inheritance Tax in Nigeria
Nigeria previously had a Capital Transfer Tax (CTT), introduced in 1979 under the Capital Transfer Tax Act 1979, by the then Obasanjo military regime. The CTT was imposed on transferring assets, including inherited wealth, upon death or as a gift. However, due to administrative inefficiencies, tax evasion, and political pressures, the CTT was abolished in 1996 by the Abacha regime in a move that cynical observers said was a move to protect the billions of dollars that he had spirited out of Nigeria. Since then, Nigeria has lacked any form of inheritance or estate tax, unlike its global counterparts. The absence of inheritance taxes exacerbates wealth inequality, as large estates and inherited wealth accumulate tax-free over generations.
The Role of Inheritance Taxes in Equity and Revenue Generation
- Reducing Wealth Inequality: By taxing inherited wealth, governments can prevent the perpetual transfer of wealth to a small elite class, fostering not just equity but also social mobility. Even in traditionally feudalistic societies like the United Kingdom, these taxes have been used as a portent force for good in ensuring a reduction of a permanent upper class based principally on privilege. Inherited wealth invariably serves as a disincentive to wealth creation based on merit, as it entrenches a permanent upper class.
- Promoting Equity in Taxation: Inheritance taxes ensure that wealthier individuals contribute more to public finances, aligning with the principles of progressive taxation. There have been growing calls for expanding the tax net to capture even illicit wealth. It is a long-established fact of tax law that the “burglar and the swindler, who carry on a trade or business for profit, are as liable to tax as an honest businessman.” So, taxation can be used as a veritable tool to harness tax revenues from even dishonest activities.
- Revenue Generation: Inheritance taxes provide a sustainable revenue stream for governments, which can be used to fund infrastructure, healthcare, education, and poverty alleviation programmes. The International Monetary Fund (IMF) reported that Nigeria’s tax-to-GDP ratio was 9.4% in 2023, indicating a massive shortfall from the African average of 18.8% and the OECD average of 34,2%.
Comparative Analysis of Inheritance Tax Systems
Let us analyse the inheritance tax structures in the UK, the US, and South Africa. Each country implements inheritance or estate taxes with varying thresholds, rates, and impacts.
The United Kingdom
In the UK, inheritance tax (IHT) is levied on estates valued over £325,000 at a rate of 40%. However, the tax applies only to the portion exceeding the threshold, and several exemptions exist for spouses, charitable donations, and small businesses. Inheritance tax contributes significantly to the UK’s tax revenue, generating approximately £7 billion annually. Notably, the new Labour government has widened the inheritance tax net to include family-owned farms, with a net worth of over £1 million, to plug the much talked about £22 billion “black hole” in UK government finances.
The United States
In the US, inheritance taxes are more complex, combining federal estate taxes with state-level taxes. At the federal level, estates exceeding $12.92 million for individuals (as of 2023) are subject to estate tax rates ranging from 18% to 40%. States such as New York and Maryland impose additional inheritance or estate taxes. The impact of some of these taxes may help explain the benevolence of wealthy Americans such as Warren Buffet and Bill Gates, who plan to distribute most of their wealth to charitable causes rather than leave their fortunes ravaged by inheritance taxes. Estate taxes contribute billions to federal revenue. For example, in 2020, estate taxes generated $17 billion in revenue.
South Africa
South Africa imposes an estate duty of 20% on estates valued below R30 million and 25% on amounts exceeding this threshold. In addition, Donations and transfers to spouses are exempt. A primary threshold of R3.5 million ensures that smaller estates are not burdened unduly. Estate duties contribute a moderate amount to South Africa’s revenue base but are essential for addressing the country’s significant wealth inequality, especially along race lines. Given South Africa’s history of economic disparity, estate taxes help address structural inequalities by redistributing wealth.
Lessons for Nigeria: Benefits of Reintroducing Inheritance Taxes
From the above comparisons, several lessons can guide Nigeria in reintroducing inheritance taxes:
- Revenue Generation for Development
Countries like the UK and the US demonstrate that inheritance taxes can contribute billions in revenue annually. For Nigeria, these funds could be used to improve much-needed infrastructure (roads, railways, power supply, education and healthcare, etc.). In addition, a portion of such taxes may be targeted at poverty alleviation and skills enhancement efforts that eventually reduce poverty and social inequality.
- Reducing inequality
Nigeria faces a growing wealth gap, with significant disparities between the elite and broader populations. By taxing inherited wealth, Nigeria can reduce the concentration of wealth within a small elite and promote social mobility and economic opportunity for underprivileged groups.
- Promoting Tax Equity
Inheritance taxes ensure that wealthier individuals contribute more to national development. Unlike consumption taxes (e.g., VAT), which disproportionately burden low-income earners, inheritance taxes target unearned wealth transfers, promoting fairness in taxation. So far, the uproar has been mainly on the distribution of VAT revenues amongst states and regions of the federation.
- Administrative Considerations
To ensure the successful implementation of inheritance taxes, Nigeria must set reasonable exemption thresholds to protect middle-income families (e.g., estates below N50 million – this is just a suggestion, as an ideal figure will need more empirical research).
In addition, the proposed tax must simplify tax administration to prevent evasion and improve compliance so that it doesn’t become burdened by evasion that is induced by the complexity of enforcement. We must also enlighten the general public on the benefits of inheritance taxation for national development.
Conclusion
At a time when Nigeria faces significant fiscal challenges and economic disparities, inheritance taxes offer a powerful tool to address inequality and fund essential public services. Policymakers must prioritise equity in taxation and ensure that the wealthy contribute meaningfully to Nigeria’s development goals. Reintroducing the Capital Transfer Tax would align Nigeria with global best practices and foster a more inclusive and equitable society.
– Ndu is a Price Waterhouse-trained chartered accountant and serial entrepreneur passionate about societal development and empowerment.
(Dr Dakuku Peterside will return to this column next week)
