Charlie Weston: Inheritance tax system needs a radical overhaul to make it fair
Inheritance tax system is open to abuse and needs a radical overhaul to make it fair and avoid it applying selectively to families
Published 11/02/2016 | 02:30
INHERITANCE tax could be one of the hot topics in the general election. Despite changes made in the last Budget, the inheritance tax regime is still a big issue in middle Ireland.
Fine Gael has promised to effectively abolish inheritance tax for the vast majority of families as part of its general election bid.
We are promised that there will a huge increase in the inheritance tax threshold from €280,000 to €500,000 over the lifetime of the next government.
The "inheritance tax trap" is a worry for many parents. They fear that an asset they have worked hard to provide, through sacrifice and saving, will have much of its value captured by the dreaded tax authorities.
Meanwhile, a "much abused" exemption from the tax means that up to 4,000 families over the past seven years escaped paying it - Revenue Commissioners officials told the Department of Finance before last year's Budget that the so-called dwelling house exemption was relatively easy to get, but was "much abused".
Revenue claimed the system is being misused, with some people falsely claiming to be resident in a family home to avoid paying tax.
The exemption allows parents to gift properties to their children without having to pay inheritance tax, which is formally called capital acquisitions tax. The tax is levied at a high rate of 33pc.
Under the exemption, the son or daughter must have lived in the house as their main residence for three years before they are gifted it.
The son or daughter must not have an interest in any other residential property. The donor, typically a parent, cannot have lived in the property during this period unless they are compelled by old age (65 or older) or infirmity to depend on the services of the child.
Also, the recipient must remain in the house for at least six years after if they are under the age of 55.
"Where a beneficiary has lived in the family home, the inheritance is exempt. Eligibility for this exemption is relatively easy and is widely availed of," Revenue officials told the Department of Finance, according to documents obtained by The Sunday Times.
Department of Finance officials pointed out to finance minister Michael Noonan that if a person moved into an inherited property, they could sell another property. What this clearly shows is that there is a need for a radical overhaul of the entire inheritance, or capital acquisitions, tax regime.
Before last year's budget, Michael Noonan faced pressure to raise thresholds on inheritance tax from homeowners, farmers and his own party. Mr Noonan responded by increasing the threshold by 24pc to €280,000.
If the system is open to abuse, that is a major reason to reshape it. But other rules for inheritance tax discriminate against middle-income families, a leading tax expert said.
Wealthy people can make gifts to their children that are greater than the exemption of €280,000 per child, as long as the amounts involved are "reasonable" when compared with their financial circumstances.
A Revenue guide to Capital Acquisitions Tax (CAT) explains that people can get an exemption when making a gift to children, a wife, civil partner or other relative.
But the amount gifted has to be "reasonable, having regard to the financial circumstances of the disponer", according to 'Guide to the CAT treatment of receipts by children from their parents'.
Tax practitioner and former Revenue official Fiona O'Shea of Tax Network, explained that rich people were able to use exemptions like this to avoid paying the tax.
The extent that you can provide for your children, and avoid the tax, depends on whether you can show that you are wealthy. This is quite shocking and discriminatory, Ms O'Shea said.
In contrast, people who scrimp and save all their lives, and are in debt, are more likely to be subject to the tax, she said.
And half of the inheritance tax paid is in Dublin, MEP Brian Hayes has revealed.
This means officials need to take a fresh look at the clear anti-Dublin bias that exists when it comes to inheritance tax.
Mr Hayes obtained figures which show that over 50pc of inheritance tax is paid from the Dublin area. Some €168.3m was paid by Dublin residents in 2014. This was out of a total of €328m. The next largest amount was paid in Cork, but it was considerably less at €27.6m.
The Government's Tax Strategy Group has proposed that the current flat rate of 33pc should be replaced.
It proposed lower rates for small inheritances, and higher rates of the tax for large inheritances.
Now that would be fairer.