By Mark Lonergan
Mirroring the recent abolition of inheritance tax on estates below £1m from Britain’s governing Tory party, the latest offering from Fianna Fáil in tax policy appears to be an all-out assault on what it perceives to be an injustice in the form of inheritance tax. It is particularly troubled by the current class thresholds in term of what can be gifted or bequeathed to a child.
It feels that the present parent-child threshold of €225,000 is too low, particularly in light of the recent increase in Dublin house prices. Its spokespeople are at pains to give examples which would create a tax injustice as they see it. One particular “harsh” example is the two children inheriting a house in Terenure worth €700,000 and having to pay inheritance tax of €41,700 each. However, the fact the two children had to pay tax on this inheritance presupposes that they own other houses otherwise the dwelling-house exemption would have come into play. In any case a €41,700 tax bill on an inheritance of €350,000 is an effective tax rate of less than 12%. The Irish Independent has also lent its voice to this “fairness” debate. Taxing the inheritance of houses in Dublin as they pass to children (who own other homes) is labelled the ultimate “stealth tax”.
FF is in effect calling for an increase in the class thresholds to lessen the burden on children inheriting a valuable house in Dublin from their parents. In support of this change in class thresholds to lessen the tax burden on these multiple-house-owners, they also suggest there is some tangible link between the parent’s hard work and the value of their family home (which is disingenuous in the extreme).
FF has costed an increase in the parent-child threshold from €225,000 to €300,000 as costing €36m in tax foregone. There can be no more undeserving recipient of a tax break than people who inherit valuable houses (except perhaps a lottery winner). There also seems to be an attempt by FF to link the bereavement period after the death of a parent to an instant large tax bill, despite the fact that the tax is often paid some years after the death. Attention is also drawn to illiquid assets. A house in Dublin is hardly an illiquid asset, it can be turned into money within a matter of months so there should be no problem in paying any tax bill.
The €225,000 Class Threshold per child is more than sufficient to pass on the wealth of the typical Irish family, tax-free. The median net household wealth of the typical Irish family is €109,000; the mean net household wealth is €231,000. This suggests significant inequality in the distribution of wealth. By way of comparison the average industrial wage in Ireland is €34,000. Half the citizens of Ireland do not even make a will, such is their penury.
Inheritance tax, also known as death duties, dates from Roman times. Caesar Augustus introduced an inheritance tax of 5% of all estates above 100,000 sesterces, in 6 AD. Capital taxes in Ireland are (and always have been) outliers when it comes to creating a tax yield for the state. Inheritance tax, while on the face of it levied at 33%, in reality is little paid: just €258m was paid in 2013 out of a total tax take of over €38bn. This is a very light imposition compared with €16bn of income tax in the same period. Many of the left-leaning political parties are urging the introduction of a wealth tax such as was introduced in 1975 but only lasted three years – as it was very costly and difficult to levy with yearly valuations and associated collection costs. Reform of inheritance tax in the form of revamping the Capital Acquisitions Tax Act which has been on the Irish Statute Books for the past 40 years is a more practical option. It could widen the tax base and take pressure off the PAYE worker.
In essence all that is required is some tweaking and tightening of the over generous reliefs and exemptions that have severely curtailed the tax take. A case in point is a full spousal/civil partner exemption on all assets received from another spouse/civil partner, irrespective of value. Some upper limit on this exemption is surely desirable in terms of estates over (say) €2m.
The Irish farming lobby business lobbies have always made sure that the transfer of agricultural and business assets attract a huge 90% reduction in market value to arrive at a taxable value figure. The net effect of this massive beano is that the effective taxable-value figure is covered by the class threshold and therefore no inheritance tax is paid. Surely there is no need to have these reliefs at such a high level. 75% Relief would be still be generous. Also there should be an upper limit in terms of value for this very generous relief. There may be compelling social reasons for allowing smaller farms to pass without much inheritance tax, but surely the ranchers of Kildare and Meath should pay their share of inheritance tax, especially since Irish farmers were something of a tax-free zone until very recently.
Our present capital taxation system favours the wealthy over the worker. Because it does not inheritances stringently, the government needs higher rates of VAT and income tax to make up the significant shortfall.
The workers of Ireland, many whom are paying income tax at over 50% on modest wages, are subsidising the rich and the lucky, and their inheritances, to a huge degree. VAT at 23% increases the cost of living across the board for all Irish citizens and is extremely regressive. Goldsmith encapsulated it: “Laws grind the poor and Rich men rule the law”
Furthermore proper inheritance taxes do very little harm to the economy where most other taxes have a significant economic sting in the tail. Indeed inheritance tax could have the positive effect of empowering children of wealthy parents to get out to work rather than awaiting gratuities.
Higher income taxes discourage work and overtime. Corporation tax increases discourage inward investment. Increases in social security levies discourage employers from taking on employees. High rates of VAT discourage consumer spending with all the detrimental effect that this has on the economy. And the cost of collection of the tax is minimal as all the various valuations will be at hand for probate purposes anyway.
At the moment Capital Acquisitions Tax (CAT) comprises gift tax and inheritance tax. Gift Tax could be set at a tax rate less than inheritance tax, encouraging lifetime transfers to the younger generation.
The government raised €292m last year from CAT on inheritances. This is despite the fact that the largest component of inheritances (family homes) was completely exempt, and the next two largest (farm and business property) were taxed to use Michael McGrath’s phrase “to a paltry degree”. A proper reform of inheritance tax should allow the government to bring in close on €1bn, and this figure would still not be a heavy burden in the context of a country whose residents according to a Central Bank estimate in 2014 are worth an estimated €504 bn.
Death and Tax are two of the certainties in life. Let’s have them working in tandem to broaden the tax base for a fairer society. •