Our inheritance tax laws should be fairer to all kinds of families
Published 07/10/2016 | 02:30
When my father died last year, his will was split between his four children. Divided evenly among the four of us, the proceeds of his will came in well below the ceiling that would have triggered inheritance tax.
I grew up in a time when four-child families were common. Today, two-child families are the norm. If two children are left a fairly average middle-class house in Dublin, there is an excellent chance they will end up paying a lot in inheritance tax because everything they inherit above €280,000 will be taxed at 33pc.
On Tuesday, this newspaper reported that the Government is planning to raise the €280,000 threshold for children who inherit a parent's estate to at least €320,000. The threshold won't be raised for anyone else.
If a person is a relative, they'll pay tax at 33pc as soon as they inherit more than €30,150, and if a non-relative, it's worse. Then they start paying inheritance tax if they receive more than €15,075.
The headline on Tuesday ran: "Budget 2017: Inheritance tax changes to hurt childless families".
A Fianna Fáil source, criticising the failure to extend the rise in the inheritance threshold to non-children, said: "One concern is for siblings in rural areas who live together but the one who passes away owns the house and land. The surviving brother or sister can find themselves left with no capacity to pay such a bill."
Another TD argued that the current plans being tabled "do not recognise the diversity of modern families".
Actually, those two statements are in direct contradiction of one another. There is nothing at all 'modern' about two siblings living together on a farm. That arrangement is as old as the hills.
In fact, I'm struggling to think of a way in which Finance Minister Michael Noonan's planned change to the inheritance thresholds doesn't recognise "the diversity of modern families" per se. Even before gay marriage, civil partners could bequeath to each other and any children. Aside from that, people have lived long-term with friends or siblings or other relatives since eons before the concept of "family diversity" was even invented.
Before proceeding, however, let's consider whether inheritance tax is even justified. Why, after your death, should anyone have to pay a penny in tax from an estate you built up out of your post-tax earnings?
An inheritance tax is, of course, another way of redistributing wealth. Something has to pay for schools and hospitals and pensions for those who otherwise couldn't afford these things themselves.
If the State denies itself inheritance tax, then it is going to have to raise tax revenues in other ways. You will be taxed more in your lifetime. How many of us would want that?
But this doesn't answer the question of what level to set it at, what the thresholds should be, and whether these thresholds should vary from one category of person to another.
The answers to the first two questions are prudential in nature, while the answer to the third is more philosophical.
Why should close family pay less inheritance tax than other family members or those who aren't family members at all?
In a way, it's a strange question to even ask. It's like asking why parents give more support to their own children than to other children. It would be very odd if they didn't. Parents have very strong duties towards their children, especially when they are still dependent and it is assumed, with good reason, that parents and their grown-up children will still have extremely close, even if sometimes frayed, bonds.
It is for this reason that we all think something must have gone badly wrong when a parent cuts a child out of their will. We'd raise our eyebrows even higher if the parent left their offspring's share of the estate to a friend instead.
So, because we all accept that the parent-child bond is particularly strong, there is almost universal support for the idea that children should pay as little inheritance tax as possible.
Where does this leave childless couples, or two siblings living together? Interestingly, a case involving two elderly sisters arose in England a few years ago. They were Joyce and Sybil Burden. When one died, the other would have to sell their shared home to pay inheritance tax.
Being sisters, they couldn't marry. Nor could they enter a civil partnership. Only by entering into such a legal relationship could they avoid inheritance tax. They thought they should be allowed to be civil partners. They fought their case all the way to the European Court of Human Rights. They lost. No good reason was given for not letting them become civil partners so they could avail of the protections and tax advantages of doing so.
Alarmingly, the Irish government joined with the British government in fighting the two sisters because a victory at the European Court of Human Rights would have had implications here as well. The Government could have found itself collecting less inheritance tax.
But in truth, there was little logic in the refusal to give the Burdens civil partnership status. In fact, the way to allow childless couples to leave assets to a loved one without a big inheritance tax bill attached is to allow any two people who care for one another, including two siblings, to enter something like a civil partnership. That only seems fair and just.