Inheritance tax should be equitable

Many tax obligations are triggered by life events. Your first job, a house purchase, marriage and retirement are all occasions for getting in touch with an Inspector of Taxes. 

Inheritance tax should be equitable

Death is also such an event. Capital acquisitions tax is the official title for a tax better known to many as inheritance tax or death duties.

It seems inheritance tax can be added to the list of things the Government is surely going to look at in the next budget.

It is currently competing with Universal Social Charge, water charges and Local Property Tax as the favourite focus for taxpayer outrage at the moment.

I can understand why USC features on this list; it’s a big tax and many of us pay a lot of it. But the yield from inheritance tax (including a tiny amount of gift tax) is low and traditionally has been.

On average, the yield is under €300m, which is only just over half of the amount collected in Local Property Tax.

It would be flippant to say that the yield depends on death rates. Far more important in calculating the yield are the rates and amount which is taxed – the latter being dependent on asset values.

Taxes on estates are long established and easier for governments to collect than many other forms of tax.

The manner in which estates must be handled, traditionally by the legal profession, leaves no room for not complying with the requirements of the Revenue Commissioners. The system in Ireland charges tax by reference to the relationship between the deceased and the beneficiary.

The closer the relationship between the deceased and the beneficiary, the greater the amount is tax free. So all else being equal, a daughter of the deceased would pay less tax than a sister of the deceased on the same bequest, and both would pay less than a beneficiary who wasn’t a blood relative at all.

The rate of Inheritance Tax which is paid on that part of the estate which is not exempt is quite high, at 33%. The rate was increased on a number of occasions in recent years as the economic downturn hit.

Rate increases though didn’t really result in any appreciable increase in the amount of inheritance tax collected.

Because property prices slumped by more than 50%, an increase in the CAT rate alone wasn’t going to result in much additional tax being collected. Instead, the threshold amount, the amount of the estate which is tax free, was cut. These reductions in the threshold were significant.

Until 2009, a son or daughter could inherit up to €434,000 without an inheritance tax liability. Now the threshold is €225,000.

The political problem with inheritance tax is the nature of what gets taxed. The value of a private dwelling which exceeds the tax free threshold will attract inheritance tax at 33%. Not all inheritances though are treated the same way.

There are inheritance tax reliefs available for assets other than dwelling houses. For example, while the calculations are wickedly complicated and terms and conditions apply, farming assets attract inheritance tax at effective rates as low as 3%.

As a consequence of these reliefs inheritance tax is becoming predominantly a charge on family homes in more valuable locations in urban areas.

As the tax is presently structured, the easiest way to resolve this issue would be to increase the tax-free thresholds. If the current son and daughter threshold were increased say to €325,000 that could help ensure that relatively modestly valued houses don’t fall subject to inheritance taxes.

This would mean that the threshold should exceed the average asking price of housing in almost every area of the country. While the UK system is not directly comparable, their inheritance tax rules were changed this month to achieve a similar objective.

While reductions in income taxes can be linked to employment, and reductions in Vat can be linked to consumer demand, the consequences of an inheritance tax change are not as clear cut.

It seems to me that the main argument for a change to inheritance tax might be to ensure greater tax equity across the various regions of the country. For “regions”, read “constituencies”. There are worse reasons for a tax cut.

Brian Keegan is Director of Taxation at Chartered Accountants Ireland

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