Death Tax
For sentimental reasons, the terms inheritance tax is also known as death tax (though not legally) because it is applied in the event of inheriting the assets. An inheritance tax is a tax paid by a person who inherits money or property of a person who has died.
Adam Smith claims in his book “The Wealth of Nations” that, to secure a maximum product, capital should be in control of those who can make the best use of it. Inheritance taxes aims to distribute capital to those who make the most of it to promote inefficiency, or at least not to guarantee efficiency. That’s a good thought.
But hold on a minute, the approach assumed is to tax the existence of wealth? There is neither any assuring that the owners of the capital to whom the capital is transferred through inheritance tax are best qualified to use it. Least of all, government can’t be trusted to assume that distribution responsibility, that’s communism 101. That is a strict no-do in the beginners lessons of market economy. Adam Smith’s ideas has lots of consequences. I mean, Adam Smith, born to famous solicitor and rich landowner of Scotland, had a view on rationality of inheritance taxes. Makes you wonder if there ever was such inheritance taxes before his time.
To be clear at the outset, Inheritance Tax doesn’t exist in Nepal. Income Tax exists in Nepal and the income tax that may be triggered at the point of death, if any, is only applicable on wealth created by the estate or trust, not the wealth transfered.
Taxable and Non Taxable Assets
Chargeable and Non Chargeable Assets
The general principle of income tax is that only disposal assets/liabilties in relation to business or investments are subject to income tax. Any assets other than investment and business assets, i.e. personal assets of an individual, are not subject to income tax.
Example:
(1) Mr.A, an individual owns a trading business. He has purchased some assets like trading assets, admin office assets and few office equipments for the operation of the business. The gain/loss derived from the disposal of such assets, related to the business is subject income taxation.
(2) Mr.A also owns Bentley Mulsanne and uses it for personal purpose. The car is very exotic in Nepal and he sold it and derived an handsome profit. Such profit is not subject to income tax, as it is his personal asset and are not business/investment assets of Mr.A.
So are all personal assets not subjected to income taxation? No.
(i) Land, (ii) Building or (iii) Interest/Security, which qualifies to be Non Business Chargeable Assets, in an entity may be subject to taxation even if they are personal assets. Personal assets other than those are not subject to taxation are are not under the purview of Income Tax Act, 2058.
Meaning of Non Business Chargeable Assets
So what is Non Business Chargeable Assets (NBCA)?
Section 2(da): “Non-business taxable assets” means any land, building and interest or security in any entity except the following properties:
(1) Business assets, depreciable assets or stocks-in-trade,
(2) A private building owned by an individual in the following situation: (a) Being under ownership for a continuous period of ten years or more, and (b) Where that person has resided for a total period of ten years or more continuously or at several times, Explanation: For the purpose of this clause, “private building” means building and the land occupied by the building or one Ropani of land whichever is lesser.
(3) Any interest of any beneficiary in retirement fund,
(4) A land, land with building and private building belonging to and disposed of by any individual for a value less than ten million rupees, or
(5)An asset disposed of by way of transfer in any manner other than the purchase and sale within three generations.
Pictorial Summary for Dummies
Inheritance Tax in Nepal
Non Market Transfer of Personal Asset
Despite the fact that personal assets are also covered by the definition of Asset under Section 2(Ka.dha) and every asset is subject to computation of gains/losses under Chapter 8: Calculation Of Net Gains From Assets And Liabilities, the gains/losses so derived are still not taxable in context of personal assets, if such personal assets do not meet the definition of Non Business Chargeable Assets under the Act. This is because the holding of personal assets is not a taxable activity under Section 5 and Section 3 of the Act. However, according to Section 2(Ka.Kha), the act of holding non-business chargeable asset is treated as an investment.
Glossary: Gift उपहार | Bequest इच्छापत्र | Inheritance अपुताली | Scholarship छात्रावृति
- Tax Consequence to Transferor: The transfer will trigger deemed disposal at market values under Section 44 or Section 45 but the gain/loss is not under the purview of Income Tax Act as per Section 5 and Section 3. This will apply to all types of non-market transfers (i) Transfer to person within 3 generation by Gift/Bequest-Inheritance/Scholarship, (ii) Transfer to other person by Gift/Bequest-Inheritance/Scholarship, or (iii) Transfer to any other person.
- Tax Consequence to Transferee: Gains are exempted if qualifies under Section 10(Cha) of Income Tax Act. Transferee is assumed to have incurred cost equal to the deemed gain of the transferor as per Section 44 or Section 45.
Non Market Transfer of Other Assets
To any person by Gift/Bequest-Inheritance/Scholarship
- Tax Consequence to Transferor: The transfer will trigger deemed disposal at market values under Section 44 or Section 45 and the gain/loss also comes under the purview of Income Tax Act as per Section 5 and 3. Applicable taxes under Schedule 1 has to be borne by the transferor.
- Tax Consequence to Transferee: Gains are exempted if qualifies under Section 10(Cha) of Income Tax Act. Transferee is assumed to have incurred cost equal to the deemed gain of the transferor as per Section 44 or Section 45.
To any person by Other Mode of Transfer
- Tax Consequence to Transferor: The transfer will trigger deemed disposal at market values under Section 45 and the gain/loss also comes under the purview of Income Tax Act as per Section 5 and 3. Applicable taxes under Schedule 1 has to be borne by the transferor.
- Tax Consequence to Transferee: Transferee is assumed to have incurred cost equal to the deemed gain of the transferor as per Section 45.
An exception to transfer between associates exists, which is discussed in my other blog here: Transfer of Tax Base between Associates
Relevant Commentaries from Symmetrica
Exemption of Gifts
Para 66: The Sample exempts gifts (including on death) unless they are derived in the course of an earning activity. Gifts from non-associated persons are included in calculating income where derived in the course of an earning activity because it is difficult to distinguish such gifts from the return from the activity in question. Further, while gifts are generally not included in calculating income of the donee, where the gift is of an asset, the donor will realise the asset. Typically, the donor will be treated as deriving an amount from the realisation equal to the market value of the asset. This means that the donor may be treated as deriving a gain from realisation or, in limited circumstances, a loss. Such a gain or loss may be included or deducted in calculating the donor’s income, i.e. as a result of the transactional basis income tax, where the relevant asset is held as part of a business or investment.
Involvement of Estate/Trust on death of an Individual
Para 188: Section 44 contains a market value rule for transfers resulting on the death of an individual. Typically, this transfer will be, in the first instance, to the deceased’s estate, which will be administered by an executor or administrator. The estate will be a trust and, therefore, treated as a separate person under the Sample. As a result of section 44, the deceased may realise gains or losses from the realisation of assets and liabilities that must be included in calculating the deceased’s income. The executor or administrator will be required to pay any outstanding tax of the deceased. The estate will have market value outgoings with respect to assets transferred from the deceased and market value incomings for transferred liabilities. Any further transfer to a beneficiary of the deceased will also be treated as made at market value. The result is likely to be no gain or loss to the estate and market value outgoings for assets or market value incomings for liabilities for the beneficiary. Some gain or loss to the estate may occur in isolated circumstances, e.g. where there is substantial delay between the date of death and the date of transfer to the beneficiary.
Prevention of Inheritance Tax
Para 168. Deemed disposal covers the situation where the person in question ceases to exist, e.g. where an individual dies. The Sample adopts the approach that all gains or losses with respect to an asset or liability should in principle be allocated to the person holding the asset or owing the liability at the time the gain or loss accrues. This means that the death of an individual is viewed as the final time of reconciliation for gains or losses accruing during the life of the deceased.
Para 169. This approach does not turn the income tax into an inheritance tax. An inheritance tax is a tax on the transfer of assets and, the income tax is primarily targeted at creations of wealth. With respect to assets and liabilities passing on an individual’s death, the Sample only reaches gains or losses that accrue to the deceased, the recognition of which were delayed during the deceased’s life. Many countries provide some relief from the recognition of gains at death. However, this approach almost invariably causes distortions. It will either encourage or discourage the transfer of assets before death or at the time of death. The approach in the Sample is to treat either form of transfer in the same manner.
Divorce/Seperation Tax in Nepal
Where a couple goes into divorse settlemet or a bonafile seperation agreement and by this reason the transfer of asset occurs, the followings will be the tax considerations if the former couple applies to IRD for such consideration:
- Tax Consequence to Transferor: Tax Base of the asset being transfered will be treated as incomings for the asset and essentially the gain amount will be zero.
- Tax Consequence to Transferee: Tax Base of the asset being transfered will be treated as cost incurred by the transferee.
If the election for this provision provided in Section 44 of the Act is not opted by the former couples, the application of Section 45 for general non-market transfer applies, which assumes the deemed disposal at market values. This will lead to tax consequences which will have to be borne by the transferor.
Windfall Tax in Nepal
“Windfall gain” means a gain obtained by means of lottery, gift, prize, tips, share of earning in a game or any other gain acquired incidentally. A more detailed analysis of windfall gain tax in Nepal is discussed in my other blog: Windfall Gain Tax in Nepal
Tax applicable on running off a cliff in Nepal !
Such taxes doesn’t specifically exist in Nepal. 
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