What's in the tea leaves for Category B inheritance transfers?
Gifts and inheritances between brothers and sisters and aunts/uncles and nieces/nephews are all considered 'Group B beneficiaries'.
The Tax Strategy Group has prepared its annual papers for the consideration of the Department of Finance ahead of this year’s budget.
Capital Gains Tax receipts in 2022 were €1.7bn, while Capital Acquisitions Tax (also commonly known as gift or inheritance tax) receipts for 2022 were €605m, giving a combined total for capital taxes of €2.39bn in 2022, which represents 2.5% of overall net exchequer receipts collected (€95.4bn).
The current approach to gifts and inheritance taxation is aligned with many other OECD countries in that the tax applies at a beneficiary level and thereby encourages redistribution of wealth amongst a greater number of beneficiaries, but interestingly, the Irish system differs from that of our nearest neighbours, the UK, who apply tax based at an estate level rather than at a beneficiary level.
Interestingly, the UK rules also include a system which promotes early lifetime transfers, as gifts transferred earlier than seven years prior to death are excluded from inheritance tax.
Many moons ago, Ireland’s tax system also encouraged lifetime transfers, with a reduced rate of tax applied in the case of gifts as opposed to inheritances.
Whilst the tax rates and reliefs that apply to Irish gifts and inheritances are now predominantly aligned regardless of whether the transfer happens whilst the transferor is alive or via their will, one benefit that operates distinctly for gifts and continues to persist is the annual exemption of €3,000 per person.
The tax yield from Capital Acquisitions Tax has increased by over 50% since 2015, and is considerably higher now than at any point in the past 20 years, even considering the Celtic Tiger years.
Of course, the rate of tax increased in the intervening period from 20% to 33%, and the tax-free threshold also bounced around from a high of over €500,000 tax-free threshold from parent to child for a brief period to a low of €220,000 in 2012 before recovering to a fairly stable level of around €330,000 over the past few years.
The increase in the tax rate was cited as needed to expand or broaden the tax base, whilst the reduction in the tax-free threshold from parent to child was cited as coinciding with the reduction in property values.
The reality is that property values have increased considerably over the past decade and are more than double what they were in 2012 at the depths of the recession. CSO statistics suggest that residential property prices have, on average, increased by 65% between 2015 and 2023.
The increase in the tax-free threshold from 2013 or even 2015 to date has fallen far short in comparison. As such, the justifications for reducing the tax-free threshold and increasing the tax rates as proffered can hardly ring true.
The Tax Strategy Group details the tax receipts from Capital Acquisitions Tax for recent years by threshold, which gives a valuable insight into who is paying the lion’s share of the tax. Interestingly a very significant portion of gift and inheritance tax, over 45% of the total exchequer receipts under this tax head, is paid by Group B beneficiaries.
The term 'Group B beneficiaries' usually refers to gifts and inheritances between brothers and sisters and aunts/uncles and nieces/nephews.
As the tax-free threshold between these groups is only €32,500 rather than €335,000 applicable in the case of transfers to children, it’s easy to see how relatively minor gifts or inheritances between parties in this grouping can easily push a beneficiary above their tax-free allowance resulting in a hefty tax bill.
Tax planning in this area ahead of time, either in advance of a gift or at the time of constructing a will, can help reduce tax exposures.
Meanwhile, the Tax Strategy Group has suggested that equalising the tax band to that which applies to children would be costly; this to my mind, suggests that less preferential tax-free limits for those in Group B will persist for years to come.
Unfortunately, the TSG hasn’t in their latest report considered any tapering or cap on the total amount of assets that can benefit from Agricultural Relief or Business Relief, further enhanced concentration of Agricultural Relief toward farmers or alteration of the tax code to once again encourage lifetime transfers.
Tinkering with the tax bands or tax rates doesn’t cut it if a change in behaviours or outcomes is the desired effect.
