Jill Kerby

INHERITANCE TAX SYSTEM NEEDS MORE THAN JUST TINKERING

Should inheritance tax-free thresholds be loosened in the next budget? Should childless people be free to leave larger sums to their nieces and nephews or even a ‘stranger’ who is dear to them?

These are some of the suggestions being made by Fianna Fail in the lead-up to the October budget, and one that’s sure to generate plenty of controversy.

Inheritance tax is one of those issues in Ireland – like property tax and water charges - that gets people’s blood boiling.

Most people I have spoken to over the years believe that having paid copious amounts of tax already on the cash or assets paid with cash that they wish to leave to their loved ones – income tax, VAT, stamp duty and property tax (where a family home or holiday home is being passed on) and innumerable sneaky levies, the government should only help themselves to a modest amount of the capital value of your estate upon your death.

Others, and they are a minority, believe inherited money is unearned, favours people who are already well off and therefore should be subject to confiscation by the state “for the common good”.

Here in Ireland, capital acquisition tax, it’s formal designation, has undergone quite a few changes in recent decades, with both the amount that can be inherited tax free as well as the band rates of taxation moving up and down in tandem with the strength and weakness of the national economy.

There is a growing expectation that the Minister for Finance will raise the parent to child inheritance tax-free benefit from €280,000 (raised from €225,000 in Budget 2016) to about half a million euro (still below the tax-free rate of €542,544 in 2009, after the financial crash).

This will reflect the rise in property prices over the past six or seven years, especially in Dublin. Property remains the single largest transferrable asset within families.

But one opposition party, Fianna Fail, is calling for the other inheritance tax thresholds to also be increased at least in line with the increase in the parent-child one. These include the threshold between siblings, aunts/uncles and nieces/nephews and between strangers, that is, people with no blood ties.

The tax-free CAT limits for these two final categories are currently €30,150 and €15,075 respectively. In 2009 they were €54,254 and €27,127.

But the reform argument should go further than that. Over the years I’ve received many letter from readers who are single or childless. Some are only children so have no siblings or nieces and nephews to whom the law would allow them to leave their estates partly-tax free.

These owners of a home or other assets for which they paid with (mainly) post-tax income say that while they may not have close family members, they do have “loved ones” – godchildren or close friends – that they would like to endow with larger sums of money upon their deaths. 

One reader, after last year’s same sex marriage referendum even made the point that “inheritance laws no longer discriminate against same sex couples. I welcome that. 

“But my husband and I were never able to have children. I am an only child and neither of us feel any obligation to pass on our estates to our siblings. Their children will be generously endowed by their own parents.

“But as a woman unable to have children, but with a godchild who I love like a daughter as her mother died when she was only 11, I feel it is most unfair that I cannot leave her a substantial legacy when I die.”

Rather than tinker with the tax-free thresholds, the entire capital acquisition tax system needs an overhaul.  In order to make the system more equitable the government could consider adopting a CAT system that taxes the estate, not the beneficiary, as applies in the USA, UK or Canada.

For example, no inheritance tax applies on estates worth up to $5.45 million in the United States, while the estate tax-free limit in the UK is only £325,000. However, in both the US and UK a liberal system of trusts and lifetime tax-free gifts will lowers the impact of the 40% tax rates in both countries, to beneficiaries.

In Canada no inheritance or estate tax applies but the value of the deceased person’s estate is subject to their income or capital gains tax rates on the imputed ‘sale’ value of their assets. Beneficiaries then receive their share tax-free.

Setting a €1 million tax free threshold to an entire Irish estate over which 33% CAT would still apply would certainly satisfy the desire of many people to leave generous bequests to non-lineal beneficiaries, and still “reward” the government.

As families and relationships change and evolve, so should our antiquated and arbitrary tax laws.  

Michael McGrath and Michael Noonan should both take note.