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The Debate: Should inheritance tax be cut in the budget?

Amid buoyant tax returns, there have been calls for a reduction in inheritance tax – but those opposed say this will benefit only the wealthiest of homeowners

In order to give rise to a tax liability, a home would need to be worth more than €670,000 if left equally between two children; €1,005,000 if left equally between three children, and so on. While such large bequests can occur, particularly in the leafier parts of south Dublin, the vast majority of those who inherit something receive far less than this. Photograph: Matt Kavanagh
Neale Richmond
Barra Roantree
Tue Jul 09 2024 - 06:00

Neale Richmond: Yes. This is a tax on wealth that has already been taxed

By any fair assessment, Ireland currently has a strong economy and that strength allows us to invest in our communities and make life a little bit easier for our people.

Ireland’s tax system is the backbone of that economy. We have a system where those who earn the most pay the most in income tax, and this is how it should be. However, our current regime of capital acquisitions tax (CAT), or inheritance tax as it is better known, is placing an undue burden on the squeezed middle at a time when they need the State’s support.

Currently, someone will pay 33 per cent tax on anything they inherit over €335,000 from a parent. For most people this will be their main interaction with any inheritance tax and, as a result, many people are faced with the prospect of selling their family home due to the tax bill. No parent should fear leaving their home to their loved one because of a tax. This is not right, it is not fair and it is an undue burden on those who want to make sure their families are taken care of when they are no longer with us.

This is even more concerning when you consider that those who do not fall into the wealthiest group in Ireland are most likely to have their wealth held in the family home. Therefore, it is not the wealthy in our society who are impacted by these taxes, it is the already squeezed middle.

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The CAT threshold is clearly not keeping pace with house values. An increase of the threshold at which children start to pay inheritance tax would send a clear message that Ireland is a place where work is valued and where people can stay in the family home if they so choose.

Succession planning is a real concern for farmers and business people. Ireland is a great place to start a business, but it is currently a more attractive place to sell a successful business than it is to scale one

Let me be very clear: those who inherit more will and should pay more, that is why we have a progressive tax system. However, this does not take away from the fact that this is a tax on wealth that has already been taxed.

Since 2012, the rate of CAT paid on inheritances over €335,000 has increased by 65 per cent, from 20 per cent to now 33 per cent. While previously one could inherit €542,544 before tax, this now stands at €335,000. Ireland is in a different place than 2012, and our tax regime must reflect this.

While the family home is an important part of inheritance, it is not the only factor. Inheritance of family businesses and family farms must also be considered. Succession planning is a real concern for farmers and business people. Ireland is a great place to start a business, but it is currently a more attractive place to sell a successful business than it is to scale one. While this is far from a straightforward issue, one change that would help would be to make it easier for people to pass down their business or family farm.

Working with the minister for finance, we must ensure that our tax system encourages people to work hard, and allows them to leave something behind for the next generation. Inheritance taxes exist to make our country more equitable: this we can all agree on. However, this must be done in a way that is fair and, frankly, one that makes sense.

Neale Richmond is a Fine Gael TD for Dublin Rathdown and Minister of State with responsibility for financial services, credit unions and insurance

Barra Roantree: No. Cutting the tax paid by the children of wealthy families would be a strange priority

Proposals to cut inheritance tax have once again been floated in advance of the budget, this Coalition Government’s last before an election.

While often presented as a reform necessary to protect the average family home from punitive taxation, the reality is it would benefit a small number of people receiving unusually large bequests.

This is because capital acquisitions tax (CAT) is paid only by the beneficiary of a gift or inheritance above a lifetime tax-free allowance at a rate of 33 per cent, not by or from the estate of someone who has died (as in other countries).

This allowance is per beneficiary and depends on the relationship between the beneficiary and who they are receiving the inheritance or gift from: currently €335,000 for that received from a parent.

What this means is that in order to give rise to a tax liability, a home would need to be worth more than €670,000 if left equally between two children; €1,005,000 if left equally between three children, and so on.

While such large bequests can occur, particularly in the leafier parts of south Dublin, the vast majority of those who inherit something receive far less than this. Indeed, statistics from the CSO show that among the third of households who have received an inheritance, the median amount received was €100,000. My analysis of the same underlying data suggests less than 10 per cent of this third received more than €335,000: that is, less than 3 per cent of households overall.

Calls to increase the CAT allowance should be seen for what they are: a giveaway to a small number of people receiving unusually large gifts or inheritances

On top of this, we should remember that even the small number of those who do inherit enough to pay CAT do so only on the part of the bequest exceeding €335,000.

Consider a home worth €1.2 million left equally between three children. Each would have a CAT liability of about €20,000 on an inheritance of €400,000: an average tax rate of just 5 per cent.

Calls to increase the CAT allowance should therefore be seen for what they are: a giveaway to a small number of people receiving unusually large gifts or inheritances.

This is particularly true given the tax-free allowance interacts with an array of outdated and hard-to-justify reliefs. Foremost among these is business and agricultural relief, which reduces the taxable value of eligible gifts and inheritances by 90 per cent.

The effect of this is to allow up to €3.35 million of such assets to be passed on from very wealthy parents to each of their children entirely tax free, and at an effective rate of just 3.3 per cent on anything above that.

The lack of a cap on this relief lacks any credible economic rationale, which is why the Government’s Commission on Taxation and Welfare called for it to be restricted. This could be done, for example, through a cap on the relief set at the value of the average family farm.

Without doing so, increasing the CAT allowance would exacerbate this glaring inequity in the system. For example, increasing the allowance from €335,000 to €500,000 would allow up to €5 million to be inherited by wealthy families entirely tax free.

Government is about choices. At a time when public services are stretched, infrastructure is creaking and average incomes are stagnating, cutting the tax paid by the children of wealthy families represents a strange set of priorities.

Barra Roantree is director of the MSc in economic policy at Trinity College Dublin and was a member of the Commission on Taxation and Welfare