Saturday 3 December 2016

Inheritance tax, Irish style: It's a tale of two cities

Karl Deeter

Published 01/11/2015 | 02:30

The Irish taxpayer's Tale of Two Cities starts like this: 'It was the worst of times, it was the worst of times'
The Irish taxpayer's Tale of Two Cities starts like this: 'It was the worst of times, it was the worst of times'

In this tale the two cities are the same city - just at different times: it's Dublin in 2005 and again 10 years later in 2015. And in this tale, a person gets treated differently in life because of how somebody else was treated in death.

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By that I'm referring to inheritance tax due on the same property. When speaking of death, 'of that day and hour no one knows' - but if you did know, you might save a loved one a whopping tax bill.

Jane is an only child. Her dad died when she was young and her mother passed away in 2005, leaving her a house worth €800,000. Back then the 'threshold' for how much you could get was €466,725 and the rate applicable above that was 20pc.

This means Jane got a taxable sum of €333,275 and she was due to pay 20pc on that, or €66,655, which she obtained by getting a top-up mortgage so she could keep the home. The good news is she got a tracker mortgage, and things worked out OK, albeit that Jane lost her final parent.

Now we'll look at the same scenario but we'll change the time of death of Jane's mother. In this instance she lived another 10 years, and died in 2015, leaving a house that is worth less than in 2005; in this case it's worth €600,000.

That would be great for Jane as she got more years with her loved one, but from a tax perspective there has been some additional punishment.

The tax-free threshold up until the budget was €225,000, a figure that in real terms was last in existence in the year 1990. It was increased to €280,000 in the budget, which may seem generous as a percentage of the low starting point, but historically means we are only back in line with the year 1999.

Jane now faces a gain of €320,000 but the tax rate has ramped up by 65pc from the former 20pc rate; now she has to pay a third of it in tax. So her tax bill is now €105,600.

That the public don't realise there is an intergenerational wealth-grab in action is only facilitated by tax (in particular non-income taxes) being 'boring' and largely misunderstood. Even on the income tax side very few people could accurately figure out their own take-home pay if given a gross pay figure.

Jane just paid €39,000 more in tax for a house that was worth less, and if she doesn't have the cash to cover the bill and tries to borrow it, she'll be hit with an uncompetitive Irish lender rate too.

The Irish taxpayer's Tale of Two Cities starts like this: 'It was the worst of times, it was the worst of times'.

Karl Deeter is the compliance manager at mortgagebrokers.ie in Dublin 2. He tweets at @karldeeter

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