What will the Tax Strategy Group paper mean for CAT?

As the old saying goes, there’s nothing more certain than death or taxes, and Capital Acquisitions Tax (CAT) is the one such tax that actually arises in both events, writes rural accountant Kieran Coughlan.

The Tax Strategy Group has presented a paper to the Government ahead of this year’s budget which sets out some of the options available to the government, writes rural accountant Kieran Coughlan.

The move to enhance gift and inheritance tax has been very well flagged over the last couple of months. The Tax Strategy Group has presented a paper to the Government ahead of this year’s budget which sets out some of the options available to the government.

The paper reflects on the background of the introduction of the tax in the mid-1970s when the tax was brought in along with the Capital Gains Tax to ‘strengthen tax equity between those earning primarily ordinary income and those whose wealth was accumulated via capital’.

As of 2022, the amount collected via Capital Gains Tax and Capital Acquisitions Tax or CAT for short, being the formal name for Gift and Inheritance Tax, was only a fraction of the total tax take at about 2.5% of the total Revenue collected by the State in taxes, and CAT makes up about a third of that totalling €605m.

As the old saying goes, there’s nothing more certain than death or taxes, and Capital Acquisitions Tax is the one such tax that actually arises in both events. Of course, CAT also applies to gifts, but generally, when it comes to gifts, there is a more thought-out process and with the benefit of tax planning in advance of a gift, the amount of tax can be reduced.

Avoiding CAT in a death scenario can be tricky as a Will prepared by the deceased gives formal instructions to the executor as to how their estate is to be divided, and it may be difficult to introduce tax planning into set instructions.

Whilst one would wholly recommend using a solicitor to make a will, in equal measure, solid tax advice by a specialised tax consultant, especially where beneficiaries are likely to exceed their tax-free thresholds, would be strongly recommended during that process as solicitors in the main might not have the in-depth knowledge of the range of options available to mitigate taxes, no different than tax consultants may not have the experience to deal with complex legal issues; each to their own specialism.

Back to the Tax Strategy Group paper, great detail is given in relation to the total number of persons who paid gits and inheritance taxes in 2022. 7347 individuals paid gift or inheritance tax on benefits received from the Parents or others with a deemed equal relationship in 2022, with a total tax take of €243m, meaning the average tax paid working out at more than €33,000 per person. 

A further 12,940 beneficiaries who received benefits from brothers, sisters, aunts and uncles paid an average of €21,906 each, and a further 4,875 persons classed as ‘strangers’ paid €85m in tax, working out at an average of €17,400 in tax each.

The perpetual argument exists that the Gift and Inheritance tax is innately unfair as the deceased persons were likely to have paid at least some level of taxes in accumulating their wealth, and the application of CAT is effectively resulting in double taxation, whilst the counterargument is that wealth bestowed on a relatively small portion of the population gives them an advantage and the application of taxation in some way can act as a social equaliser.

The budget options on the table are to reduce the tax rate from the current rate of 33%, widen the tax-free thresholds, and potentially increase the tax-free thresholds with some flagging that the main threshold applicable between parents and children rising from €335,000 to €400,000.

The Tax Strategy Group paper also fleshes out Agricultural Relief and Business Relief, highlighting that these two reliefs are worth about 200m each per annum. Both reliefs are important to Ireland’s farmers; whilst Agricultural Relief is focused on land transfers, Business Relief is very much needed when it comes to the transfer of farming companies, agricultural contracting businesses and associated businesses that support farming.

According to the paper, the rationale for CAT agricultural relief is to ‘promote the intergenerational transfer of family farms and ensure they continue to be actively farmed’, while the rationale for CAT business relief is to ‘promote the intergenerational transfer of family businesses and ensure those businesses continue to make a contribution to the economy’.

Both of these mission statements deserve merit, but one would have to question whether the current system is facilitating the establishment of a new landlord class where beneficiaries can avoid gift or inheritance tax on farm transfers and simultaneously enjoy the benefits of income tax-free land rents.

For capital gains tax, a new cap of €10m was introduced, applying from 2025 onwards; one would question whether there should be a sliding scale of gift or inheritance tax which would apply where the benefits being transferred under Agricultural or Business Relief exceed a certain threshold if the original ambition of tax equity between those earning primarily ordinary income and those whose wealth was accumulated via capital is to be maintained.

The leased land income tax exemption could be seen to exacerbate the issue and perhaps a reconcentration of that relief to persons who had previously farmed their holdings for 15 years or more might be worthy of consideration. 

As it stands, the speculation is that the budget changes will be incremental rather than radical, and a shift in the tax bands or tax rates is likely to be the approach rather than any radical moves, all to be revealed in a matter of weeks.