To them that already hath, why should so much more be given?
The Irish Times business journalist, Fiona Reddan, provided some interesting reflections on inheritance tax in Ireland in an article published in the newspaper on 7 April. Although the current programme for government did not propose any changes to inheritance tax, Ms. Reddan suggests it may begin to loom larger on the political agenda.
Not being an expert on tax matters, I am taking Ms. Reddan’s facts and figures at face value.
Potential beneficiaries from any will fall into one of three categories or clusters.
Group A comprises bequests in both directions between parents and children. These are subject to a tax free threshold of €335,000. Group B consists of legacies to what might loosely be described as close but still more distant relations: brothers, sisters, nephews, nieces, ancestors or, maybe more likely, other descendants (e.g., grandchildren) of the deceased. For these, the tax free threshold is €32,500. All other bequests to more distant relations (e.g., cousins) or to non-relations are subject to a threshold of €16,250. Capital Acquisitions Tax (CAT) is payable at a rate of 33% above those thresholds.
The thresholds have fluctuated over the medium term. Ms. Reddan points out that the Group A threshold is significantly lower than its peak of €542,544 in 2009, but also significantly higher than its trough of €225,000 in 2015. The current levels have been constant since 2019.
Unsurprisingly, the overall tax take has “soared”, as Ms. Reddan describes it, since thresholds were at their peak. According to Ms. Reddan, €522 million was paid in CAT in 2019, more than double the yield in 2010. But the yield is also up by 30 per cent since 2015, despite the substantial increases, 49 per cent in aggregate, in the tax free thresholds between then and 2019.
The number of people paying CAT is also rising. According to Ms. Reddan:
Figures from Revenue show that some 16,000 people paid capital acquisitions tax (CAT) in 2019, up by 46 per cent on the near-11,000 that paid it in 2011.
You won’t win any prize for identifying the reason why the CAT net is catching more money and more people. It’s the resurgence of property prices, especially in Dublin.
According to Daft.ie, the average listed price for homes in Ireland in the last quarter of 2020 was €269,522. Outside Dublin, the only county where average prices exceeded the Group A CAT tax free threshold was Wicklow at €342,607. Galway City was next on €317,235. Within the Dublin area, asking prices in the north and centre of the city only slightly exceeded the threshold, but the south city (€428,260) and, more acutely, south county Dublin (€619,012) did so handsomely.
Ms. Reddan says that Dublin accounted for 49 per cent of all inheritance tax payers and 53 per cent of receipts in 2019.
And, as house prices start to edge upwards once more — prices are currently rising on an annualised basis of about 5 per cent — more Dublin dwellers can expect to be pulled into the CAT net.
It’s something that’s likely to anger many, which is why perhaps it is coming back on the Government’s agenda.
She offers an outline suggestion about what the Government might do. It is more an adjustment of the tiller than radical shift in direction and predicated on the notion that taxation of bequests from parents to children is the most politically sensitive issue — for two reasons. First, because there is more often an automatic expectation on the part of children that they will be the main beneficiaries of their parents’ estate. And second, because the parent(s)’ primary residence, routinely described in this context as “the family home”, is generally a large proportion of that estate.
She points out though, that the aggregate CAT yield to the Exchequer from Group A bequests from parents to their children is actually considerably less than the yield from Group B bequests to more remote relatives. The figures for 2019 were €162.7 million and €230 million respectively. Referring to those Group B receipts, Ms. Reddan says:
This lucrative earner means that there may be scope for the Government to pursue some punter-friendly increase in the main parent-to-child threshold — while continuing to bring in more money from the other categories.
Dismissing the possibility of expensive homes in south Dublin being exempted entirely from tax, she concludes:
However, the optics of a smaller move on the family home could make sense. And with asset prices rising, it could be paid for with a continuing rise in revenues from other categories.
Ms. Reddan lingers only briefly on the broader question of the social policy basis for exemption or relief from inheritance tax.
Supporters argue it [inheritance tax]’s essential as a means of wealth distribution, as it seeks to try and reduce how much inherited wealth can be passed on.
Opponents, however, decry it as a form of double taxation: first, you’re taxed on the income needed to buy the house or the asset. Second, your estate has to pay tax on the same asset, once it’s transferred to them.
But whatever your stance, for a relatively low revenue generator (less than 1 per cent of the total tax yield in 2020), inheritance tax nonetheless attracts a fair share of attention from politicians and populace alike. Ironic, in a way, when you consider that the people who argue loudest against it, are never those who actually end up paying it.
She does not tell us how she measures what counts as “a fair share of attention”. I certainly don’t hear too much about it. Nor does she tell us why she thinks the loudest voices are those who will never be burdened with the tax. A plausible suggestion would be that the loudest voices come from the left, where wealth might be less abundant than on the right. But Ms. Reddan offers no support at all for her claim.
I have never found the argument that inheritance tax is unfair because it is double taxation remotely persuasive. By that logic, being charged VAT, excise, customs or stamp duty on goods or services paid for from our income is equally double taxation. And it is not intuitively obvious to me that the concept of “double taxation” as such is, in any event, obviously unfair rather than just unattractive. It certainly sounds penal and unfair, the proverbial double whammy, but that doesn’t mean it actually is.
Then there is the quasi-sacred sentimental status some assign to the so-called “family home”, not Ms. Reddan herself it should be said, though she does acknowledge its political sensitivity. She cites the Tánaiste, Leo Varadkar setting out his party’s take last June as being “that no one should pay tax on inheriting a family home of average value” and vowing to press that case.
There might be some meat on the bone of the case for lenient tax treatment where the “family home” has been the principal residence of the benefitting offspring as well as their deceased parent(s). But there is already provision for the property to be exempt from CAT in those circumstances, subject to conditions that are entirely reasonable rather than onerous.
Undeserving of any sympathy is the contention that a son or daughter who has previously been living elsewhere should be able to inherit the property tax free simply by taking up residence there in succession to their deceased parent(s).
Two other notions deserve instant dismissal. The more ludicrous is that offspring no longer resident in the family home should nonetheless be able to inherit it tax free because of the lingering sentimental attachment arising from having been brought up there. Only slightly less ludicrous is the idea that beneficiaries should not be “forced” to sell the family home even though they are not living in it themselves as the only way to raise the cash to pay the CAT “bill” arising from inheriting it.
And that leads neatly to another feature of the legacy landscape that is rarely mentioned — not because it is obscure. Rather it is glaringly obvious — but Irish reticence around discussion or disclosure of personal income and wealth renders it hidden despite being in plain view. The primary reason why more people are having to pay CAT and in larger amounts is because legacies are growing too. If rising asset values are boosting the Exchequer’s coffers, they are also boosting the bank accounts of will beneficiaries. One in three Euro above the threshold goes to the Government but the other two are going into the pockets of people who have done nothing to earn them and, in the case of children of deceased parents, after they get the first €335,000 free of any tax at all.
It surprises me that the onus of justification in discussions around inheritance tax seems to be placed on those who might seek to place restrictions on how much tax free money beneficiaries can get. It’s as if the “natural” order of things is that there should be no inheritance tax at all and society is being generous and forbearing in tolerating government’s insistence on applying it. To borrow Ms. Reddan’s tentative language again: inheritance tax “seeks to try and reduce how much inherited wealth can be passed on” — as if the tax is an artificial effort to dam or divert the natural intergenerational flow of money.
Let’s look again at an earlier point made by Ms. Reddan:
…the people who argue loudest against it [inheritance tax] are never those who actually end up paying it.
I think we are entitled to draw the inference from this statement that government and society should listen to and heed less the views of people not actually burdened by a particular tax than the views of those who are. And one can take that several steps forward: that those who pay more tax generally should have a greater say in the running of the country, implying the “haves” qualify for a better class of citizenship than the “have nots”.
I’d respectfully suggest that our perspective on inheritance tax should be inverted. Rather than trying to stretch upward the threshold for how much can be inherited free of tax, we should be yanking downward the amount people are allowed to inherit at all — and dispositions from parents to children is an especially acute case of unfair patronage.
We have abandoned the hereditary principle as a legitimate basis for allocating social benefits like school places, professional positions and public offices. Parents no longer “own” these intangible assets in the sense of being able to hand them down freely to their children. Naked nepotism is out of fashion.
We should do much the same with the disposition of tangible estates — money, physical property, land or other assets — of the dead. The accidental circumstances of our birth, whether we are born into privilege or poverty, normally assure us of a head start or a handicap in progressing through life before we come to inherit anything at all. The additional bonus of a legacy lotto win for which the winners don’t even have to buy a ticket and who are already likely to number among the “haves” is hard to justify.