It seems almost certain that inheritance tax (Capital Acquisition Tax, or CAT) will be cut in the next budget, most likely through an increase in the tax-free threshold. This would be highly regressive. It would equate to a €21,000 tax cut for those receiving large inheritances. At a minimum, progressives should oppose any cuts in the tax rate (33 percent) and any increase in the tax threshold.
First, inheritances and gifts are ‘unearned income’. Put simply, unearned income is any money you earn by doing nothing. If I receive an inheritance – from a parent, an aunt or a stranger – I haven’t done anything for it.
Let’s compare two households.
- Household A receives a €335,000 inheritance from their parents. They will pay no tax as all inheritances and gift below that amount are tax free.
- Their neighbour, Household B, ‘earns’ €42,000 per year. Over eight years, this will equal €335,000 – the same amount as the inheritance tax-free threshold. However, they will pay €58,000 in income tax, USC and PRSI over the 8 years.
Question: where is the equity or the logic in a situation where someone pays no tax on unearned income, while paying tax on earned income – either as a PAYE worker or self-employed? If anything, unearned income should be taxed more.
Second, according to David McWilliams:
‘In Ireland, wealth has become increasingly concentrated in the hands of those at the very top.’
He goes on to estimate that the top 1 per cent of households own about 15 per cent of the nation’s wealth; the top 10 per cent of households hold over half of the wealth; while the top 30 per cent owning close to 80 per cent of the nation’s wealth.
Third, if the inheritance tax-free threshold is increased from €335,000 to €400,000 (which seems to be the consensus), this will result in a €21,450 tax cut for all those with inheritances of over €400,000. This is a massive and unjustified tax cut for those receiving high levels of unearned income.
Fourth, a major argument in the inheritance tax-cut debate is the treatment of houses. Minister Richmond argued:
‘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.’
This is a peculiar statement. CAT has nothing to do with ‘valuing work’ – it is a tax on unearned income. But it’s the housing issue which is being pushed out.
- Most inheritance recipients pay no tax as their inheritance is too small to attract a liability.
- Many inheritance recipients already own their home. Receiving another home is merely adding to their assets – either to rent out or sell in the market.
- Many inheritance recipients may be renting. Getting a house through inheritance means they substantially reduce their housing costs; namely, they stop paying rent (which in Dublin averages about €18,000 a year). That is a considerable saving.
Regarding the Minister’s ‘people can stay in the family home’ reference, there is already provision for a daughter / son who is living in the family home being able to inherit the house tax-free. There are conditions attached: they must have lived in the house as their main home for the three years immediately before the inheritance; they must not own another house; and the house must continue to be the main home for six years after the inheritance. However, I am aware that some parents are worried their child may not be able to inherit their home tax-free despite the fact they comply with all the above conditions.
Of course, in many (most?) cases, two, three or more children receive the inheritance. Therefore, a house valued at €750,000 bequeathed to three children will not attract a tax. This suggests that the increase in the threshold is merely a subsidy to high-wealth, high-income households.
So at a minimum, progressives should strongly oppose any increase in the inheritance tax thresholds or any cut in the already low tax rate (33 percent). However, we can go further – and turn inheritance tax into a vehicle for greater equity, generating increased resources for reinvestment in public services and social protection.
The Commission on Taxation made a number of proposals regarding inheritance tax.
- The tax-free threshold for children should be ‘materially reduced’. In other words, instead of increasing tax-free thresholds, the Commission recommends they be cut, thereby exposing more inheritances to tax.
- The level of Agricultural and Business Relief available for CAT should be reduced.
- A small, general charge should be introduced for all inheritances, to broaden the tax base.
These recommendations are going in the opposite direction to the tax-cut chorus.
The Irish Fiscal Advisory Council estimated that the Government could raise €400 million by implementing the Commission on Taxation’s proposals regarding inheritance and gift tax – though this is on the high side, requiring a dramatic reduction in thresholds. In Budget 2025, €100 million in revenue would be a more realistic target – as a first step in implementing the Commission’s proposals.
An increase in rates would also be practical. The marginal tax rate for CAT is 33 percent; for an average earner, the marginal tax rate is 48 percent. Raising the CAT rate would start to bring it line with average earned income.
“Unfairness” and “anomalies” relating to inheritance tax are issues that deserve to be considered in advance of the budget, Taoiseach Simon Harris has said. The Fine Gael leader made the remarks when asked about discussion within his party as to cuts to the tax in the budget.’
If there are anomalies, fix them. But that’s not a justification for a highly regressive tax cut. For instance, the Commission on Taxation proposed that foster children be treated equally with other children. The Tax Strategy Group recommends that all gifts and inheritances should be reported to the Revenue Commissioners, to ensure tax compliance. Partners should be treated in the same manner as married couples. And the issue of a child living in the family home being able to inherit the house tax-free as per the conditions listed above, should be clarified.
Increases in the inheritance tax should be part of a long-term drive to tax capital on the same basis as labour. Let’s leave the last word with TCD’s Barra Roantree:
‘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.’