Can the Government afford to cut inheritance tax?

Dublin dwellers bear brunt of rising inheritance tax, but there may be way to ease pain

Most people are likely to pay inheritance tax not on gifts received from their immediate family, but from those outside it.

Most people are likely to pay inheritance tax not on gifts received from their immediate family, but from those outside it.

 

Supporters argue it’s essential as a means of wealth distribution, as it seeks to try and reduce how much inherited wealth can be passed on.

Opponents, however, decry it as a form of double taxation: first, you’re taxed on the income needed to buy the house or the asset. Second, your estate has to pay tax on the same asset, once it’s transferred to them.

What are the options for leaders looking to curry favour with potential voters?

But whatever your stance, for a relatively low revenue generator (less than 1 per cent of the total tax yield in 2020), inheritance tax nonetheless attracts a fair share of attention from politicians and populace alike. Ironic, in a way, when you consider that the people who argue loudest against it, are never those who actually end up paying it.

Now, with property prices on the move once more and exemptions from inheritance tax stagnant since 2019, it may become an issue once more this year.

But with the public finances looking increasingly straitened on the back of the impact of the Covid-19 pandemic, what are the options for leaders looking to curry favour with potential voters?

Inheritance tax

Under the current rules, more than €1 million can be left, free of tax, by parents with three children, giving a tax-free threshold of €335,000 per child. It’s more than back in 2015, when just €675,000 could have been passed on tax-free to three children; however, it’s down by some 38 per cent on 2009.

The Group A threshold, which covers transfers from parents to children, peaked in 2009 when it was worth €542,544, fell to a trough in 2015, and has been on the increase, 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 such taxes has soared.

Inheritance or gift tax of €522 million was paid on €1.6 billion worth of assets in 2019, for example, while preliminary figures for 2020 suggest CAT of €494 million was paid on assets worth some €1.5 billion. The 2019 figure is more than double the yield in 2010, a 13-year low, and is up by 30 per cent on 2015.

But if the value of the tax collected is up, so too is the number of people paying it. Figures from Revenue show that some 16,000 people paid capital acquisitions tax (CAT) in 2019, up by 46 per cent on the near-11,000 that paid it in 2011.

A Dublin issue

It’s primarily a Dublin issue. With a tax-free threshold of €335,000 per child, and average house prices of about €220,000 outside the capital, paying tax on an inheritance is only an everyday concern for a certain few outside the capital, even if it does exercise the minds of many.

In Dublin, however, where the average house price in some parts is significantly more, the thresholds are more of a consideration.

The Category A tax threshold on inheritances and gifts has absolutely no bearing on dwelling house relief. Photograph: iStock
"The figures show that, since 2011, the number of Dublin dwellers who have to pay property tax has rocketed by almost 70 per cent, up from 4,155 to 7,002 in 2019." File photograph: iStock

Dún Laoghaire-Rathdown for example, has the highest average price in Ireland at €600,986. With two children, and just an average house, a CAT bill may be likely if there are other assets outside the family home.

Unsurprisingly then, Dublin accounted for 49 per cent of all inheritance taxpayers and 53 per cent of receipts in 2019, the most recent year for which such information is available.

As house prices start to edge upwards once more... more Dublin dwellers can expect to be pulled into the CAT net

Cork was the next biggest contributor, with 1,262 taxpayers accounting for 7.8 per cent of all receipts. Some counties contributed far less: Cavan and Monaghan for example, are grouped together in Revenue statistics, with just 195 taxpayers paying inheritance tax in 2019.

The figures show that, since 2011, the number of Dublin dwellers who have to pay property tax has rocketed by almost 70 per cent, up from 4,155 to 7,002 in 2019. And the amount they are contributing has also soared, up from 42 per cent of receipts in 2011, to 53 per cent for 2019. At the same time, the numbers facing inheritance tax outside of the capital has also increased – but only by 35 per cent over the same period.

Indeed someone from Cavan/Monaghan paid an average of €16,410 in inheritance tax in 2019, while in Donegal, 198 taxpayers paid an average of just less than €11,000. In Dublin however, the average payment was €25,078.

And, as house prices start to edge upwards once more – prices are currently rising on an annualised basis of about 5 per cent – more Dublin dwellers can expect to be pulled into the CAT net.

Family home

It’s something that’s likely to anger many, which is why perhaps it is coming back on the Government’s agenda.

While it wasn’t included in the current programme for government, last June Tánaiste Leo Varadkar set out his party’s take on it when he said that no one should pay tax on inheriting a family home of average value and vowed to press that case.

This follows previous pronouncements from the same party that it would look to increase the threshold to bring it back in line with a previous threshold of some €500,000.

However, despite the focus on such, it’s not transfers from parents to children, or the “family” homes that Mr Varadkar referred to, that are the big earner for the exchequer.

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, brother or sister, or niece/nephew or other linear relatives, which brings in the most revenue.

Exempting a family home in Dún Laoghaire-Rathdown is highly unlikely

This threshold reached a peak of €54,524 in 2009, but has since slid by about 38 per cent to €32,500. With much less of the inheritance exempt, it means that the tax yield from this cohort has soared. It accounted for half of all inheritance tax revenues in 2019 (at €230 million), almost doubling since 2011, and yielded 42 per cent more than the €162.7 million raised from inheritances from parents to their children.

Indeed the fact remains that most people are likely to pay inheritance tax not on gifts received from their immediate family, but from those outside it.

Some scope

This lucrative earner means that there may be scope for the Government to pursue some punter-friendly increase in the main parent-to-child threshold – while continuing to bring in more money from the other categories.

Exempting a family home in Dún Laoghaire-Rathdown is highly unlikely; according to papers from the Tax Strategy Group, increasing the Group A threshold to €400,000 would cost €35 million, indicating a move to €500,000 would cost more than €80 million. Not something the Government can afford this year.

However, the optics of a smaller move on the family home could make sense. And with asset prices rising, it could be paid for with a continuing rise in revenues from other categories.