Inheritance tax is going to be cut in the budget, probably through a hike in tax-free thresholds. And so one of Ireland’s few taxes on wealth will be chipped away at. Economic experts warn that over the next decade the State needs to raise more tax, not less. And that higher taxes on wealth need to be part of this. But with the exchequer buoyed – for now – by surging corporate taxes, a cut in inheritance tax bills is a certainty for budget day. The only question is by how much.
The public’s attitude to tax is a strange thing. In theory, people are in favour of policies that increase equality and hit the wealthy. But ask them about inheritance tax and you quickly hear about “double taxation”, and people being allowed to pass on their “hard-earned money”. And so a tax that only affects a minority of people in any kind of serious way was spotted by Fine Gael as something where change would appeal to its electorate. Fianna Fáil happily jumped on board, with Tánaiste Micheál Martin declaring that it was “punitive on the average family”. Which it isn’t, given that the average inheritance is about €100,000 and well below the tax-free threshold for children – though why let the facts get in the way of a good soundbite. That’s not to say there aren’t areas that need reform, the most obvious being cohabiting couples who are not married or in a civil partnership, who currently get no special relief. This could be fixed. But the hard cases are used to push for general relief and with the exchequer – for now – awash with cash, the Coalition will find the temptation impossible to resist.
Most people favour wealth taxes in theory, though they don’t consider themselves wealthy. But despite this, internationally as well as in Ireland, inheritance tax attracts a particular public antipathy. In the UK, YouGov polling since 2019 finds a consistent 50 per cent of the public see inheritance tax as “unfair” or “very unfair”, compared with about 20 per cent who see it as “fair” or “very fair”.
The reasons for this are not entirely clear, but as well as an economically rational opposition from the better-off – because they get hit – it seems to include an attachment to looking after family – particularly children. In 2024 Ireland, the need for inheritances or gifts to help family members to buy a property may also be a factor. And people’s world view is obviously a factor too – former minister Alan Shatter has dubbed inheritance tax as “State-approved grave robbery”.
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The public object particularly strongly to tax changes that are seen as representing a loss, rather than ones where the exchequer is taking part of a gain, according to ESRI behavioural economist Pete Lunn. Lack of visibility also helps. So, for example, Lunn points out that the rise in the standard rate of VAT from 21 per cent to 23 per cent during the austerity years attracted little political heat – the tax was an invisible slice on money spent to buy things – while the household charge, that turned into the local property tax, and the water charges were big issues. They required money to be handed over up front.
On inheritance tax, the taxpayer in Ireland is the recipient who is, of course, receiving a wad of money. But it seems that nonetheless this may be seen as “family money” on which tax has already been paid. Handing over a straight payment to the Revenue – that could be large in the case of a big inheritance – is not surprisingly unpopular, even among those who are unlikely to ever have to pay.
Nor is Ireland unusual here. A big OECD study shows that over time the importance of inheritance tax as a source of revenue has withered across the developed world, with some countries abolishing the tax entirely and other reducing its burden.
[ Unmarried couples locked out of inheritance tax exemptionsOpens in new window ]
Overall, as the Commission on Tax pointed out, Ireland taxes wealth lightly – it calculated a tax rate of about 14.5 per cent on capital in Ireland, compared with an EU average of more than 26 per cent. The Irish tax system has generous tax exemptions in many areas of capital tax, including for the family home. As tax experts have put it, death is the ultimate form of legal tax avoidance, as all the gains in value made on the assets you hold are wiped out for capital gains tax purposes. Those who inherit must still pay, of course, but with a tax-free threshold of €335,000 for children, little or no tax is paid on many inheritances. Because of this, much of the inheritance tax bill falls on other inheriting relatives and friends where allowances are a lot lower. And much of Ireland’s wealth is never taxed at all.
Meanwhile, there are extraordinarily generous provisions for people leaving farms and businesses to children, that in effect generally wipe out the vast bulk of any liability. The case, from an equality point of view, to impose more tax on wealth is clear – even if the impact on inheritance on inequality is complicated – and the commission has plenty of suggestions here. But without the backdrop of a public finance crisis it will not happen: the last time inheritance tax was hiked was after the financial crash, when the rate was increased to 33 per cent.
This may look fine for now. But at some stage – barring an ongoing exponential surge in corporation tax – the public finance position will start to tighten due to the ageing population, climate change and the cost of State services. Ireland should now be preparing for this, but in a populist political environment, this simply won’t happen. Those left exposed are younger people, who may be left to foot future bills through the quick and easy way to raise money – higher income taxes. Wealth and property taxes are less economically damaging but much more politically toxic.
The surge in corporation tax has given Ireland a free pass in recent years and allowed trade-offs to be ignored. It means that those calling for lower inheritance tax are under no pressure to identify how this should be paid for, or how it fits in to the future of Ireland’s public finances. And because people feel strongly about this, there is money around and a general election coming, they are pushing at an open door.