Is the “inheritance tax trap” a myth?

Taoiseach Enda Kenny has plans (according to a Sunday Independent report last week) to slash the inheritance tax bill for most families with a promise to raise thresholds. This would remove most people from that particular tax net.

Fine Gael has been coming under increasing pressure from within its own party, from home owners in Dublin, and from farmers for reform of the inheritance tax regime.

In Budget 2016, Finance Minister Michael Noonan raised the thresholds but documents obtained under FOI show that public servants did not necessarily believe the issue was quite as pressing as the Taoiseach does.

In a pre-Budget submission, Mr Noonan was told that the so-called “inheritance tax trap” really only cropped up in “quite particular circumstances” where people were forced to sell a family home to pay tax liabilities.

The Department of Finance was also told by Revenue officials that an exemption from inheritance tax for people who already lived in a property was being “much abused”.

Nonetheless, the government has obviously decided that the priority is not reforming the “much abused” system, but rather helping ensure that people pay less tax on what is described accurately in separate FOI documentation as “unearned income”.

The full submission is below:

 

 

You can read the original story in the Sunday Times here (subscription required)

The Department of Finance sent a detailed response to five questions only after publication:

1.      “If increase of bands was actually necessary considering documents suggest the “inheritance tax trap” was something of an illusion.”

Response

This query appears to relate to paragraphs 10 and 11 of record number 47. The point being made in these paragraphs is that where a person inherits the property in which they reside and has no interest in another property, then it is likely that they will benefit from the CAT dwelling house exemption and have no CAT liability in respect of that inheritance. Where an individual does not qualify for the dwelling house exemption (for example because he or she already has a residence separate to the property being inherited) and a liability to CAT arises, there are options available for paying the tax in a manageable way. The increase in the Group A lifetime tax-free threshold from 14 October 2015 will help mitigate the scale of any tax liability which may arise in asset transfers between parents and their children, given increases in asset prices (particularly property prices) over recent years.

2.      “The Revenue suggestion that the dwelling house exemption covered most of these cases [our italics] and that it was “much abused”.”

3.      “Why Revenue’s idea that inheritance tax should apply to everything but at 50% market value was not pursued”.

Response

It is not clear where, in the material provided in response to the FOI request, that the “suggestion” framed in italics comes from or what the reference to “most of these cases” means.

The CAT dwelling house exemption is designed to prevent hardship in the case of home-sharers where a beneficiary inherits the property in which he/she resides and has no interest in another property and would otherwise have to sell the inherited property in order to pay the inheritance tax. It is an appropriate exemption for this reason.

The exemption is, however, subject to conditions and the Revenue Commissioners have found in some instances that arrangements have been put in place by individuals to comply with the terms (if not the spirit) of the conditions in order to claim the dwelling house exemption in circumstances for which the relief was not originally envisaged. For this reason, the qualifying conditions and requirements of the exemption are subject to ongoing review and changes to the conditions are periodically examined and considered. A review of the qualifying conditions for the relief is ongoing.

4.      Revenue’s suggestion that thresholds were a concern because they could just end up being “dictated by Dublin price movements”.

5.      I was also looking for any general comment the Department might have on why they made the changes they eventually did,

Response

The Minister has stated that he decided to increase the Group A tax –free threshold to €280,000 in recognition of the improving state of the national finances and of the concerns expressed to him by people making and receiving gifts and inheritances, particularly in a context of rising property prices. The scope and scale of the change was determined in large part by the limited fiscal space available. The Minister has also stated that he views the Budget 2016 change as the start of a process. Provided, among other factors, that our economic recovery continues, he has indicated that he will examine the scope for further improvements in the tax-free thresholds in the future.

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