It is the wish of every parent to be able to provide security for their family. In their later years, a parent will naturally want to be able to pass on the fruits of their lifetime's work to their children and grandchildren. Whether this is in the form of the family home or savings, it is very important to parents that they are able to help secure the future financial well-being of their family.
Recent increases in property values mean that many more families are now potentially drawn into the inheritance tax net. In many areas, a modest family home can no longer be passed from parent to child without triggering a massive inheritance tax liability. This can often result in the forced sale of the property to pay the tax to the State.
The following example illustrates the problem. Say the parent of an only child died in January 2015, leaving the child with a house which was worth (on paper) €350,000 at the time. At current thresholds, the child will have to pay €41,250 in inheritance tax. Had they inherited a similar valued property in January 2011 (when property prices nationally were broadly at the same level they are now) they would have paid just €4,479 in tax. Their tax liability has gone up more than nine-fold.
There are two reasons for this massive increase in the tax liability. Thresholds were reduced substantially when property values were falling, but have not been adjusted back up in line with the recent rise in prices. In fact, thresholds are now at the same level as they were in 1995. The rate at which the tax is applied has also increased massively from 25pc in 2011 to 33pc now.
Death taxes have been a bonanza for the Government coffers. The number of people brought into the tax net has increased by 34pc since 2010 and the amount raised has more than doubled. This year, the Government expects to take in €400m in tax on gifts and inheritances. It is easy to see why they have been reluctant to make changes to how the tax is applied. It has proven to be the ultimate stealth tax.
Hardship often arises in a case where a child has stayed at home to be a support and companion to their parents and thus has never bought their own house.
They can then be hit with a potentially huge inheritance bill when the last surviving parent passes on.
While an exemption exists to allow a parent gift a house to a child who has been living in it for three years prior to the gift, this comes with a significant test attached. The parents cannot have lived there during this period unless they are compelled by old age or infirmity to depend on the child. Establishing this as a matter of fact can be difficult.
To help remedy these situations, Fianna Fáil is proposing a significant increase in the current thresholds. For example, the cost of increasing the Category A (parent to child) threshold from €225,000 to €300,000 would be €36m, but would significantly relieve the pressure on families at a time of huge emotional distress.
While the immediate priority in relation to inheritance tax should be to substantially increase the thresholds to reflect recent developments in property prices, we also need to fundamentally reform how the tax is levied. Fianna Fáil is proposing the removal of the wild variations in the yield by adjusting the thresholds on an annual basis in line with asset price inflation.
In addition, we would make the process of paying the tax fairer.
While there is a process currently to allow a person with an inheritance tax liability to spread the payment over a number of years, the interest rate is so high as to render this facility redundant. Fianna Fáil would also allow those with large CAT liabilities on illiquid assets to spread out the liability over an extended period of at least five years at a low interest rate.
Another category that also needs to be looked at is that of inheritances between siblings. It is not uncommon for brothers and sisters to live together into old age.
Under current thresholds, a family member is only able to inherit €30,150 tax-free from a sibling. This paltry sum means that many are hit with massive inheritance bills on the death of a brother or sister with whom they have shared a home.
It is a gross injustice and should be remedied by a significant increase in the threshold which applies.
Death and taxes are two of the certainties in life. Nobody likes to think about what will happen after they pass on. However, the State can make things a little easier on families who have to deal with bereavement, by reducing the crippling burden that now looms over far too many of them.
Michael McGrath is the Fianna Fáil Spokesperson on Finance and a TD for Cork South Central