Need To Reinstate Capital Transfer Tax In Nigeria

The recent furore generated by the tax reform bills sponsored by the Tinubu administration has elicited the need to look at the en­tire concept of tax action in Nigeria. This article will look at an often ignored aspect of taxation, that of taxing residual wealth from generation to generation. As Nigeria continues to grapple with economic challenges, rising inequality, and the need for sustainable public rev­enue, the reinstatement of the scrapped Capital Transfer Tax (CTT) emerges as a compelling solution.

Inheritance taxes have been successfully implemented in many economies to enhance revenue generation, reduce wealth inequality, and improve equity in taxation. In Nigeria, the top 10% of the popu­lation holds almost 30% of the nation’s income.This figure has remained trend­ed upwards in recent years, indicating a significant concentration of income among the wealthiest segment of the pop­ulation.



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%. It’s important to note that income dis­tribution figures can vary over time due to economic policies, market dynamics, and data collection methodologies.

Ad­ditionally, while income distribution pro­vides insight into economic inequality, wealth distribution—which includes as­sets like property and investments—can present a different picture and is often more skewed. Addressing such disparities is there­fore crucial for promoting economic equi­ty and social stability in Nigeria. We can ill-afford to create a permanent elite class that enjoys privilege in perpetuity simply because their forbears were able, in what­ever manner they did, to amass wealth in the past.

This article explores the need for Nige­ria to adopt inheritance taxation as part of ongoing tax reforms and compares inheritance tax structures in the UK, US and South Africa. These comparisons highlight the po­tential positive impacts of inheritance taxes in fostering equity, funding devel­opment, and closing the wealth gap in Nigeria. 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 the trans­fer of 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 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. As the country faces increasing fiscal pressure and economic disparities, it is impera­tive to consider the reintroduction of an inheritance tax system to address these challenges. The Role of Inheritance Taxes in Equity and Rev­enue Generation Inheritance taxes serve several purposes: 1.

Reducing Wealth Inequality: By taxing inherited wealth, governments can prevent the perpetual transfer of wealth to a small elite class, fostering 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 that is based prin­cipally on privilege. Inherited wealth in­variably serves as a disincentive to wealth creation based on merit, as it entrenches a permanent upper class.

2. Promoting Equity in Taxa­tion: Inheritance taxes ensure that wealthier individuals contribute more to public finances, aligning with the princi­ples of progressive taxation. There has been growing calls for the expansion of 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 business man.”. So taxation can be used as a verita­ble tool to harness tax revenues from even dishonest activities.

In the United States, when the government was unable to pin specific crimes against the Mafia dons, it resorted to tax evasion, which has a much less onerous burden of proof as it most times shifts this burden of proof to the tax payer rather than the tax man. 3. Revenue Generation: Inheritance taxes provide a sustainable revenue stream for governments, which can be used to fund infrastructure, healthcare, education, and poverty alleviation pro­grams.

The International Monetary Fund (IMF) reported that Nigeria’s tax-to-GDP ratio was 9.4% in 2023, indicating a huge shortfall from the African average of 18.8% and the OECD average of 34,2%.

Comparative Analysis of Inheritance Tax Sys­tems To highlight the benefits of in­heritance taxes, it is useful to analyze inheritance tax structures in the UK, US and South Africa. Each of these coun­tries 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. It is noteworthy that the new Labour gov­ernment has widened the inheritance tax net to include family owned farms, with a net worth of over £1 million, in a bid to plug the much talked about £22 billion “black hole” in UK government finances.

The UK’s progressive inheritance tax system ensures that the wealthiest estates contribute more to public finances. Funds are often reinvested in public services, reducing the wealth gap. The UK sys­tem balances fairness with exemptions to protect middle-income families while ensuring wealth redistribution across the wealthier families.

The United States In the US, inheritance taxes are more complex, as they combine 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 majority of their wealth to charitable causes rather than leave their fortunes to be ravaged by inheritance taxes. A num­ber of them have enrolled in the Giving Pledge, where they pledge to give away 50- 99% of their wealth to charitable causes.

Estate taxes contribute billions to fed­eral revenue. For example, in 2020, estate taxes generated $17 billion in revenue. By taxing the largest estates, the US ensures that ultra-wealthy individuals contribute proportionally to public finances while avoiding undue burdens on smaller es­tates.

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: 1. Revenue Generation for Development Countries like the UK and 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, and 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. 2. Reducing Inequality Nigeria faces a growing wealth gap, with significant disparities between the elite class and the broader population.

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. In a country such as Nige­ria with a vast gulf between the haves and the have-nots, reducing inequality is key to societal stability and peace. 3.

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 largely been on the distribu­tion of VAT revenues amongst states and regions of the federation. 4.

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 complexity of enforce­ment. We must also enlighten the gener­al public on the benefits of inheritance taxation for national development. Conclusion The reintroduction of inheritance tax­es or the Capital Transfer Tax in Nigeria is a necessary step in achieving tax equity, reducing wealth inequality, and generat­ing sustainable revenue for development.

By adopting lessons from countries such as the UK, US, and South Africa, Nigeria can design a fair and progressive inher­itance tax system that balances revenue generation with social justice. 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. It is time for policymakers to prioritize equity in taxation and ensure that the wealthy con­tribute meaningfully to Nigeria’s devel­opment goals.

Reintroducing the Capital Transfer Tax would not only align Nige­ria with global best practices but also fos­ter a more inclusive and equitable society. *Ndu (FCA), is a Price Waterhouse-trained char­tered accountant and serial entrepreneur who has a passion for societal development and empowerment. *(Dr Dakuku Peterside, will return to this col­umn next week).