Boosting government revenue at the expense of future generations

By: Joseph Wong

The reintroduction of an inheritance tax is emerging as a potentially disastrous proposal aimed at boosting government revenue. While the idea may seem fair on the surface, the implications for property buyers - many of whom have worked tirelessly to save and invest for future generations - are deeply concerning. For the average Malaysian, the bulk of their estate is tied up in property, making this tax particularly unfair and burdensome.

Although details have been released about the proposed inheritance tax, it is reasonable to assume that it would apply to all asset classes, including real estate. 

One of the most glaring issues with an inheritance tax is that it essentially imposes a tax on inflation. Over time, property values tend to rise, driven by inflation, increased demand and the limited availability of land. For many Malaysians, property investment is a hedge against inflation, with real estate appreciating faster than the official inflation rate.

By taxing inherited properties, the government would effectively be taxing inflation, punishing homeowners for price increases they could neither control nor avoid. For example, consider someone who bought a semi-detached property in the 1980s for RM200,000. By the time of their passing in 2024, the property is worth RM1.2mil. While this increase in value may seem impressive, most of that appreciation is attributable to inflation over four decades.

Much of the property’s value increase is due to inflation rather than actual economic gain. Factoring in even a modest inflation rate of 3% over those 40 years would mean the true increase in property value is much lower than it seems. Yet, an inheritance tax would still apply to the inflated price, forcing beneficiaries to pay a significant tax on what is essentially the cost of inflation.

One of the most troubling aspects of an inheritance tax is that it would be imposed whether or not the beneficiaries have realised any economic gain. Often, inherited properties are still being lived in by family members, who have not sold the property and thus have no financial liquidity to cover an inheritance tax.

For example, a widow who inherits her late husband’s property would be required to pay inheritance tax, even if she is still living in the home and has not sold it. Should she be unable to afford the tax, the government could seize the property, leaving her homeless, which is a heartless outcome for a widow simply trying to live out her remaining years in the family home.

Penalising years of hard work

An inheritance tax would also amount to double taxation. After all, the money used to purchase property was earned through income that had already been taxed. Now, the government proposes to tax that money again simply because it is being passed on to the next generation. This essentially punishes those who have worked hard, saved diligently and invested wisely.

Inheritance tax sends the wrong message -that working hard, saving and investing is futile because the government will take a significant portion of your assets upon your death. It discourages individuals from building wealth for future generations and instead promotes a spend-it-all mentality, as any wealth accumulated will be taxed away.

Proponents of inheritance tax argue that it will help reduce economic inequality. However, there is little evidence to support this claim. Countries with inheritance tax laws, such as France and Germany, do not necessarily have lower levels of inequality compared to nations without the tax. For instance, Germany, with a 30% inheritance tax rate, has a lower Gini coefficient (a measure of income inequality) than France, which has a 45% tax rate. Meanwhile, Canada, which has no inheritance tax, boasts a relatively low Gini score.

Malaysia’s Gini coefficient is already comparable to that of developed countries like the United States, even without inheritance tax. There are far more impactful factors driving economic inequality such as educational disparities and the impact of globalisation. Introducing an inheritance tax will not solve these deep-rooted issues, and to suggest otherwise is to offer false hope.

At its core, inheritance tax is a punishment for success. Individuals who have worked hard, paid their taxes and invested in assets such as property are being unfairly targeted. Their intention was to improve their family's economic future but the tax threatens to strip away that legacy.

If Malaysia hopes to achieve its goal of becoming a fully developed nation, it must reward hard work and encourage the accumulation of wealth, not penalise those who have succeeded. Imposing an inheritance tax would send the wrong message to citizens that striving for success and leaving a better future for one’s children is futile because the government will take a portion of that success upon death.

A threat to the property market

The property market is one of the key pillars of Malaysia’s economy. An inheritance tax could create widespread negative effects on this sector, potentially discouraging property investment. People may become hesitant to invest in real estate if they know that a significant portion of their property’s value will be taxed when it is passed on to their heirs. This could slow down the property market and hamper overall economic growth.

Moreover, the tax would affect not just wealthy individuals but ordinary Malaysians whose primary wealth is in the form of their family homes. Many families may find themselves in the devastating position of having to sell properties just to cover inheritance tax bills, leading to financial instability and emotional distress.

A burden on future generations

Inheritance tax does more than penalise the current generation. It also places an undue burden on future generations. The children and grandchildren who inherit properties would have to deal with the financial pressure of paying taxes on homes they may still be living in. This could force them to sell family assets just to cover the tax, eroding any financial head start they might have received from their parents or grandparents.

This tax disproportionately affects middle-income families who rely on inherited property to secure their financial future. In contrast, the wealthiest individuals often have sophisticated estate planning strategies to mitigate the impact of such taxes, leaving ordinary citizens to bear the brunt of the burden.

While the government seeks to generate additional revenue, an inheritance tax is not the answer. Instead, policymakers should focus on promoting economic growth, reducing inefficiencies in public spending and finding more equitable ways to address wealth inequality without punishing those who have worked hard to secure a better future for their families.

In sum, the proposed inheritance tax would create far more problems than it solves, damaging the very foundations of Malaysia’s economy and its aspirations for a prosperous, equitable future.

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