The difference between a tax loophole and a tax relief is that a loophole is a relief for which you don’t qualify. This flippant definition has been overtaken by the events of the past few years.
Since 2008, many forms of tax reliefs and incentives have been whittled-out of the tax code. Taxpayers are confined to standard reliefs and allowances, like PAYE allowances, and to paying tax at high marginal rates after that.
Some tax reliefs, though, have survived — a case in point is the dwelling-house relief, which can reduce the inheritance tax on homes.
Tax policy is still used as an instrument to engineer social change. This is obvious when we consider the high rates of tax on cigarettes, the levy on plastic bags, and the reduced VAT on items like children’s clothing. But the desire to promote social change also applies to one of the oldest taxes of all — inheritance tax.
Any nation as sensitive to property rights as Ireland is will always be suspicious of a tax on property and inheritance. Maybe that’s why inheritance tax (or capital acquisitions tax, as it is more formally known) generates little revenue for the Exchequer.
It is one of the least lucrative taxes, bringing in about €400m every year. That’s less than the local property tax brings in.
Successive governments have decided that inheritance tax shouldn’t prejudice business activity.
Usually, it is possible for family businesses to be passed down to the next generation without an exposure to tax.
Measures introduced two years ago use the inheritance-tax system to encourage the transfer of farmland from older to younger generations. Relief from inheritance tax is available, if a farm is passed onto a generation that will ensure it is actively farmed, either directly by themselves, or by a tenant.
This agricultural relief is one of the most valuable in the tax code, and reduces the inheritance tax bill by up to 90%.
Inheritance tax is unusual, because it is charged with reference to the relationship between the person receiving the gift or inheritance, and the person giving the gift or leaving the inheritance. A gift from a stranger will be more heavily taxed than a gift from a parent. The rate is high, at 33%, so there are plenty of rules to ensure it can’t be evaded.
It’s impossible for a solicitor to make a legal transfer of an inheritance to a beneficiary without the Revenue knowing about it.
Of course, for most parents, the biggest family asset is the home. There is a threshold amount, which is the amount that a child can receive tax-free from their parent, and that stands at €280,000.
If the family home has a higher value, the child will pay inheritance tax on the excess over €280,000. Inheritance tax is becoming predominantly a charge on family homes in more valuable urban locations.
This is where the dwelling-house relief becomes important. Dwelling-house relief eliminates the inheritance tax charge, where the child has no place of their own.
Figures obtained by Deputy Michael McGrath, from a parliamentary question last month, suggested that 700 families availed of this relief in 2015, at an Exchequer cost of €52m.
That is a big number, but, in the overall scheme of things, it’s only one-eighth of the total capital-acquisitions tax yield.
And if the promise in the Programme for Government, to raise the parent-to-child threshold to €500,000, is kept, fewer homes again will fall into the tax trap.
As with all tax loopholes or tax reliefs, I wouldn’t be naive enough to suggest that the dwelling-house relief works exactly as intended, in all cases.
But no more than the agricultural relief I described earlier, the social idea behind it is sound. It needs to be retained, at a time when housing difficulties are so high on the agenda.
* Brian Keegan is director of taxation with Chartered Accountants Ireland
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