The need to reinstate the scrapped capital transfer tax in Nigeria

The recent debate surrounding the tax reform bills introduced by the Tinubu administration highlights the need to reassess Nigeria’s overall taxation strategy. One overlooked area is the taxation of wealth passed across generations. As Nigeria grapples with economic challenges and widening inequality, the reintroduction of the scrapped Capital Transfer Tax (CTT) emerges as a viable solution.

Inheritance taxes, successfully implemented globally, can enhance public revenue, reduce wealth inequality, and promote equitable taxation. In Nigeria, the top 10% of the population controls nearly 30 percent of national income, with the income gap between the top 10 percent and bottom 50 percent standing at 14 to 1. Addressing this disparity is essential to prevent the formation of a permanent elite class, promoting social equity and stability.

This article advocates for reinstating inheritance taxation as part of Nigeria’s tax reforms. By comparing inheritance tax systems in the UK, US, and South Africa, we can identify the potential benefits for Nigeria in fostering equity, funding development, and narrowing the wealth gap.

Historical context of inheritance tax in Nigeria

Nigeria introduced the Capital Transfer Tax in 1979 under the Obasanjo military regime. The tax targeted asset transfers, including inheritances and gifts. However, due to administrative inefficiencies, tax evasion, and political interference, the tax was abolished in 1996 during Abacha’s regime. Critics suggest this decision shielded illicit wealth from scrutiny.

Since then, Nigeria has lacked inheritance or estate taxes, exacerbating wealth inequality by allowing large estates to accumulate untaxed over generations. Given Nigeria’s fiscal pressures and economic disparities, reintroducing inheritance tax could help address these issues.

The role of inheritance taxes in equity and revenue generation

Inheritance taxes play a crucial role in achieving several goals:

Reducing wealth inequality: Taxing inherited wealth prevents continuous wealth transfer to a small elite, fostering social mobility. In countries like the UK, inheritance taxes reduce the dominance of a permanent upper class.

Promoting tax equity: Wealthier individuals contribute more to public revenue, aligning with progressive taxation principles. Taxation can also capture illicit wealth. The US has used tax evasion charges to prosecute individuals when direct criminal evidence was unavailable, demonstrating taxation’s potential as a governance tool.

Generating revenue: Inheritance taxes offer a sustainable revenue source. Nigeria’s tax-to-GDP ratio of 9.4 percent in 2023 falls below Africa’s 18.8 percent average and the OECD’s 34.2 percent average. Inheritance tax could help bridge this gap.

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Comparative analysis of global inheritance tax systems

A comparison of inheritance tax structures in the UK, US, and South Africa illustrates the potential benefits for Nigeria.

The United Kingdom

The UK levies a 40 percent inheritance tax (IHT) on estates exceeding £325,000, with exemptions for spouses, charitable donations, and small businesses. Inheritance tax generates around £7 billion annually, contributing to public services. Recent Labour policies have extended IHT to high-value family farms to address fiscal shortfalls.

The UK’s approach balances revenue generation with fairness by protecting middle-income families while taxing the wealthiest estates. This ensures equitable wealth distribution and funds critical public projects.

The United States

The US combines federal estate taxes with state-level inheritance taxes. Estates exceeding $12.92 million (as of 2023) face rates between 18 percent and 40 percent. States like New York and Maryland impose additional taxes. Wealthy Americans often donate fortunes to avoid tax burdens, exemplified by Warren Buffet and Bill Gates’ involvement in the Giving Pledge, where billionaires commit to donating most of their wealth.

Estate taxes generate billions annually, ensuring the ultra-wealthy contribute to public finances without overburdening smaller estates.

South Africa

South Africa’s estate duty imposes a 20 percent tax on estates below R30 million and 25 percent above this threshold. Transfers to spouses are exempt, with a R3.5 million primary threshold protecting smaller estates. Estate taxes moderate wealth inequality, addressing economic disparities rooted in apartheid-era inequities.

Lessons for Nigeria: Benefits of reintroducing inheritance tax

Nigeria can draw several lessons from global practices:

Revenue generation: Countries like the UK and US demonstrate that inheritance taxes contribute billions to national revenue. In Nigeria, these funds could finance infrastructure, healthcare, education, and poverty alleviation.

Reducing inequality: Taxing inherited wealth reduces economic disparities, preventing wealth concentration among elites. This promotes social stability by enabling broader economic participation.

Tax equity: Inheritance taxes target unearned wealth, ensuring the wealthiest individuals contribute more. Unlike VAT, which burdens low-income earners, inheritance taxes promote fairness.

Administrative simplicity: Nigeria can implement reasonable exemption thresholds (e.g., estates below N50 million) to protect middle-income families. Simplified processes will improve compliance and prevent tax evasion.

Addressing implementation challenges

To ensure the success of an inheritance tax, Nigeria must:

Set clear exemption thresholds to protect middle-income families.

Develop efficient tax administration to reduce evasion.

Educate the public on the benefits of inheritance tax for national development.

Conclusion

Reintroducing inheritance taxes in Nigeria will enhance tax equity, reduce inequality, and generate essential revenue for development. By learning from global practices, Nigeria can design a progressive system that balances fairness with economic growth.

At a time of significant fiscal challenges, inheritance taxes represent a powerful tool for promoting social justice and funding public services. Reinstating the Capital Transfer Tax aligns Nigeria with global standards and fosters a more inclusive society.

Emeka Ndu is a Price Waterhouse-trained chartered accountant and serial entrepreneur passionate about societal development.