Can the government afford to reduce inheritance tax?
Proponents argue that it is essential as a means of distributing wealth, as it seeks to try to reduce the amount of inherited wealth that can be passed on.
Opponents, however, decry it as a form of double taxation: First, you are taxed on the income needed to buy the house or property. Second, your estate must pay tax on the same property once it has been transferred to it.
What are the options for leaders looking to curry favor with potential voters?
But regardless of your position, for a relatively small revenue generator (less than 1% of total tax revenue in 2020), inheritance tax nonetheless attracts a good deal of attention from politicians and the public. Ironic, in a way, when you know that the people who oppose it the strongest are never the ones who end up paying for it.
Now, with property prices on the move again and inheritance tax exemptions stagnating since 2019, it could become an issue again this year.
But as public finances look increasingly stretched due to the impact of the Covid-19 pandemic, what are the options for leaders looking to curry favor with potential voters?
Under current rules, more than €1 million can be left tax-free by parents of three children, giving a tax exemption threshold of €335,000 per child. This is more than in 2015, when only €675,000 could have been passed on tax-free to three children; however, it is down about 38% from 2009.
The Group A threshold, which covers transfers from parents to children, peaked in 2009 when it stood at €542,544, fell to a low in 2015 and has been rising, very slowly, ever since. .
Given that the tax-free threshold is still more than a third off the peak, it’s no surprise that with less relief on the table, the yield from these taxes has skyrocketed.
For example, inheritance or gift tax of €522 million was paid on €1.6 billion of assets in 2019, while preliminary figures for 2020 suggest that a CAT of €494 million euros was paid out of assets worth approximately 1.5 billion euros. The 2019 figure is more than double the 2010 return, a 13-year low, and is up 30% from 2015.
But if the value of the tax collected increases, the number of people who pay it also increases. Figures from Revenue show around 16,000 people paid Capital Acquisitions Tax (CAT) in 2019, up 46% from the nearly 11,000 who paid it in 2011.
A Dublin problem
This is primarily a Dublin issue. With a tax exemption threshold of €335,000 per child, and average property prices around €220,000 outside the capital, paying inheritance tax is a daily concern for only a few. outside the capital, although it exercises the minds of many.
In Dublin, however, where the average property price in some areas is significantly higher, the thresholds are taken into account more.
Dún Laoghaire-Rathdown, for example, has the highest average price in Ireland at €600,986. With two children and just an average home, a CAT bill may be likely if there are other assets outside of the family home.
Not surprisingly, Dublin accounted for 49% of all estate taxpayers and 53% of receipts in 2019, the most recent year for which this information is available.
As property prices begin to rise again…more and more Dubliners can expect to be lured into the CAT net
Cork was the second largest contributor, with 1,262 taxpayers accounting for 7.8% of all revenue. Some counties contributed much less: Cavan and Monaghan for example, are lumped together in the income statistics, with just 195 taxpayers paying inheritance tax in 2019.
Figures show that since 2011 the number of Dubliners who have to pay property tax has soared by almost 70%, from 4,155 to 7,002 in 2019. And the amount they contribute has also increased , from 42%. revenue in 2011, to 53% for 2019. At the same time, the number of people subject to inheritance tax outside the capital has also increased – but only by 35% over the same period.
Indeed, a resident of Cavan/Monaghan paid an average of €16,410 in inheritance tax in 2019, while in Donegal, 198 taxpayers paid an average of just under €11,000. In Dublin however, the average payout was €25,078.
And, as property prices begin to climb again – prices are currently rising on an annualized basis of around 5% – more Dubliners can expect to be drawn into the CAT network.
This is something that is likely to irritate more than one, which is why it may be back on the government’s agenda.
Although it was not on the government’s current platform, last June Tánaiste Leo Varadkar laid out his party’s position when he declared that no one should pay tax on the inheritance of a family home from medium value and pledged to press on this matter.
This follows previous statements from the same party that it would seek to raise the threshold to bring it down to a previous threshold of around €500,000.
However, despite the emphasis on this, it is not the transfers from parents to children, or the “family” homes that Mr Varadkar referred to, that are the main source of revenue for the Treasury.
While much of the attention is focused on this, given, perhaps, the certainty of inheritances in this area, it is rather Group B, which covers gifts to a grandchild, a brother or sister, or niece/nephew or other lineal relatives, who brings in the most income.
Exempting a family home in Dún Laoghaire-Rathdown is highly unlikely
This threshold peaked at €54,524 in 2009, but has since fallen by around 38% to €32,500. With much less exempt inheritance, this means the tax yield for this cohort has skyrocketed. It accounted for half of all inheritance tax revenue in 2019 (at 230 million euros), almost doubling since 2011, and yielding 42% more than the 162.7 million euros from parents’ inheritances to their children.
Indeed, the fact remains that most people are likely to pay inheritance tax not on gifts received from their close family, but from people outside them.
A certain range
This lucrative source of revenue means the government could have the opportunity to pursue a bettor-friendly increase in the main parent-child threshold – while still bringing in more money from other categories.
Exempting a family home in Dún Laoghaire-Rathdown is highly unlikely; According to documents from the Tax Strategy Group, raising the Group A threshold to €400,000 would cost €35 million, indicating that a move to €500,000 would cost more than €80 million. Not something the government can afford this year.
However, the optics of a small move into the family home might make sense. And with rising asset prices, this could be paid for by a continued increase in income from other categories.