INHERITANCE, estate and gift taxation can be an important instrument to address inequality, particularly in the current context of persistently high wealth inequality and new pressures on public finances linked to the COVID-19 pandemic, said a report by the Organisation for Economic Cooperation and Development (OECD) on Tuesday.

The high degree of wealth concentration in OECD countries as well as the unequal distribution of wealth transfers further reinforces inequality, said the report.

On average, the inheritances and gifts reported by the wealthiest households (top 20 per cent) are close to 50 times higher than those reported by the poorest households (bottom 20 per cent).

"Inheritance taxes - particularly those that target relatively high levels of wealth transfers - can reduce wealth concentration and enhance equality of opportunity," it notes, surmising that inheritance taxes have generally been found to generate lower efficiency costs than other taxes on the wealthy, and to be easier to assess and collect than other forms of wealth taxation.

A majority of OECD countries currently levy inheritance or estate taxes – 24 in total. However, these taxes typically raise very little revenue. Today, only 0.5 per cent of total tax revenues are sourced from inheritance, estate and gift taxes on average across the countries that levy them.

Generous tax exemptions and other forms of relief are a key factor limiting revenue from these taxes and primarily benefit the wealthiest households, reducing the effective progressivity of inheritance and estate taxes.

Individuals are often able to pass on significant amounts of wealth tax-free to their close relatives thanks to high tax exemption thresholds. Tax relief is also common for transfers of specific assets such as main residence, business and farm assets, pension assets, and life insurance policies.

In a number of countries, inheritance and estate taxes can also largely be avoided through in-life gifts, due to their more favourable tax treatment.

These provisions reduce the number of wealth transfers that are subject to taxation, sometimes significantly so. Across eight countries with available data, the share of estates subject to inheritance taxes was lowest in the United States (0.2 per cent) and the United Kingdom (3.9 per cent) and was highest in Switzerland (12.7 per cent) and Belgium (48 per cent).

"While a majority of OECD countries levy inheritance and estate taxes, they play a more limited role than they could in raising revenue and addressing inequalities, because of the way they have been designed," said Mr Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration.

The report also underlines the wide variation in inheritance tax design across countries. The level of wealth that parents can transfer to their children tax-free ranges from close to USD 17,000 in Belgium to more than USD 11 million in the US.

Tax rates also differ from a majority applying progressive tax rates, while one-third apply flat rates.

To make these taxes more acceptable by the public at large, the report underlines the need to provide citizens with information on inequality and the way inheritance and estate taxes work, as these tend to be misunderstood.