There may not have been a change in Government but, since December, we do have a new Minister for Finance in Fianna Fáil’s Michael McGrath.
Most recently, McGrath was Minister for Public Expenditure and Reform, but before that, spent many years in opposition as Fianna Fáil’s spokesman for finance. During this time, the chartered accountant from Carrigaline was vocal on a number of issues impacting consumers from a personal finance/taxation perspective.
So, now that he has assumed the driving seat of the Government’s financial and economic strategy, what might we see from the new Minister for Finance?
Inheritance tax reform
Describing the yield from death taxes as a “bonanza” back in 2015, McGrath has on multiple occasions in the past called for changes to the inheritance tax regime – in particular with respect to the tax free thresholds.
He has also described the comparatively low threshold for sibling to sibling, or so-called group B transfers as a “gross injustice”. Back in 2015 it stood at €30,150, but has since only increased to €32,500.
Likelihood: It’s not just McGrath who has expressed a preference for cutting inheritance taxes. Back in 2018, Fine Gael outlined plans to increase the parent to child Group A threshold from €280,000, at which it stood at the time, to €500,000. However, it has only increased it to €335,000, so there are perhaps concerns around the potential cost of changing the threshold.
Moreover, it may be more difficult to increase the group B threshold as McGrath has called for, given the amount of money it now brings in. In 2021, for example, the yield from group B cases (€250 million) was greater than the yield from group A (€248 million).
Whether or not he does go ahead with a reduction come the autumn, he’s unlikely to go in the opposite direction; in January, he told the Dáil that he does not “have any plans to introduce further taxes on wealth at this time”.
Cut exit tax
It has been an issue for quite some time now, but could 2023 be the year that exit tax is cut? With interest rates on deposits slowly starting to rise, making them more attractive, the differential between tax charged on deposits and on investment products is likely to become more apparent.
Savers, of late, opted for deposits for the security they offered, rather than any return available but with interest rates rising, this is likely to change.
The issue goes back some years. From 2002 to 2016, the tax imposed on gains on both deposits and investment funds was at the same level. However, in the budget that year, Dirt was cut back to 39 per cent, while the tax levied on investment products, such as those sold by life assurance companies, remained at 41 per cent. Since then, the gap has widened, with Dirt dropping to 33 per cent in 2020, and exit tax still 41 per cent.
This means that a gain of €1,000 on a deposit product would be subject to a tax bill of €330, compared with €410 for a similar gain on an investment product.
Groups representing the life sector have lobbied firmly on the issue on an annual basis, arguing that it penalises small to medium-sized savers, but there has been no change.
Of course, the issue for savers in recent years has been that only minimal returns were possible, so the tax rate became largely a moot point. Indeed the yield from Dirt was just €20 million in 2021, down from €581 million in 2012. The yield from exit tax on the other hand was €129 million, up from €43.4 million in 2012.
According to last summer’s tax strategy group papers, cutting exit tax from 41 per cent to 33 per cent would cost €24 million in a full year.
In 2018, a Department of Finance report looked into the issue, but concluded that the products are different in a number of respects, namely, the level and application of fees to clients, the level of risk and return and potential losses, and hence the way in which they are taxed. A further review was conducted in 2020, which suggested that an argument could be made for considering a cut to exit tax.
Likelihood: In the past, McGrath has expressed an interest in reviewing the situation, arguing in 2018 that the tax rate “gives people a financial incentive to put their money into one form of savings product rather than another”.
But will he change it? Well, he has signalled that another review is needed first, so it may not be on the cards for this year’s budget. This time round, it would be welcome if the review covered a wider scope of investments and how they are taxed, and also considered how products such as exchange traded funds are taxed.
Cut taxes for middle income earners
Like its counterpart in Government, Fianna Fáil has pledged to cut the tax burden on middle income earners.
Back in 2016 for example, McGrath said that, if elected, the party would abolish the Universal Social Charge (USC) for all earners up to €80,000 over five years. Subsequently, in its 2020 election manifesto, the party said it would cut the USC rate from 4.5 per cent to 3.5 per cent. This is a measure clearly aimed at middle income earners, as this rate applies on earnings of between €22,920.01 and €70,044.
Likelihood: It’s likely that workers will see some further relief in their tax burdens later this year – although it will unlikely be enough to keep up with inflation.
As outlined in the Programme for Government, credits and bands will be index linked to earnings, and a further move is likely here, with McGrath saying in December that when it comes to relieving the burden for those earning above and below €40,000, “the obvious way to do that is through tax credits”.
Moreover, after the much publicised suggestion of a 30 per cent tax rate last spring, Mr McGrath has said that it will be “examined properly” this year. Last year’s Tax Strategy papers showed that such a tax rate, covering income from €36,800 to €46,800, would lead to an annual tax saving of €1,000 per person (although the reduction may now be less, following the widening of the 20 per cent band in last October’s budget).
Cut CGT
Currently levied at a rate of 33 per cent, capital gains tax (CGT), which is levied on profits made on the sale of assets such as property and shares, has been at this level since it was raised during the financial crisis by then minister for finance Michael Noonan in 2012. It had previously been cut to just 20 per cent by Charlie McCreevy during Bertie Ahern’s reign as taoiseach, but was increased to 22 per cent in October 2008 and has been rising since.
Back in its election manifesto for 2020, Fianna Fáil proposed cutting the rate of CGT to 25 per cent, a reduction in the rate of almost a quarter. This would mean that the tax bill on profits realised of some €100,000 would drop from €33,000 to €25,000.
Likelihood: It has been a long-held Fianna Fáil view that CGT is too high. Something which might hold the new Minister back, however, is the ongoing departure of smaller landlords from the rental market. Cutting the CGT rate would offer an incentive to many to continue this exit, as gains would be subject to a lower level of taxation.
Bring back mortgage interest relief
Given the sharp rise in interest rates that many homeowners are currently facing, mortgage interest relief is back on the agenda.
The relief, which was abolished at the end of 2020, reduced the burden of mortgage interest on homeowners by allowing them to offset a percentage of interest costs against their tax bill.
In the past, the amount of interest eligible for relief was capped, although these caps tended to be generous. For example, in 2018, married first-time buyers had a threshold of €15,000.
Those on tracker mortgages will have seen a number of increases since last April. Many of these, by virtue of having their trackers with loan servicers rather than lenders, have limited options to switch.
Those who can switch, despite the sharp increase in costs, may be reluctant to give up their trackers, given that they may once again prove very valuable should interest rates start to fall at ECB level again.
In order to offer some relief, then, Sinn Féin spokesman on finance Pearse Doherty has recently called for the return of mortgage interest relief.
Likelihood: McGrath has expressed support for the relief in the past, remarking in 2015 as Fianna Fáil finance spokesman: “This payment is a very important support for families, particularly those struggling with sky-high variable mortgage rates.”
He is now taking a somewhat different view, however. Earlier this month, he said there were no plans to reintroduce the benefit, arguing that doing so would cost €655 million a year.