Why did Fine Gael government postpone decision on tax loophole used as vehicle for tax avoidance by wealthy individuals?

The Department of Finance decided last year they would not reform a rampantly abused exemption from inheritance tax despite knowing for close to a decade that it has been used for tax avoidance by the wealthy.

A specific loophole in Revenue rules allows parents gift valuable properties to sons and daughters without paying any tax — so long as their child has lived in the property for three years … and remains there for another six years.

The loophole has in the past been used to transfer properties worth tens of millions of euros each year, and is being aggressively used by tax accountants as a mechanism for their wealthiest clients to help shelter money.

Documents obtained by the Sunday Times under FOI reveal that both the Department of Finance and Revenue Commissioners have known since at least 2007 that the scheme is the subject of systematic abuse.

However, a plan to examine it was removed from the Finance Bill list last year so that they both the Department and Revenue could gather further “data and evidence” on the scale of abuse.

An email sent from a Department official to the Revenue in April explained that they would only have a “truncated timespan” in which to consider it, and so it would be better to postpone.

It said: “I know from our conversation that Revenue have already set in train some actions to gather whatever data … may be available together establishing whether there is evidence of significant abuse.”

As part of that discussion, a Department of Finance submission was also circulated, which revealed that Revenue had already carried out a review of the exemption and its abuse nine years ago.

That briefing note was clear in its findings saying there was strong evidence that it was then being used by “some wealthy individuals” to avoid inheritance tax.

“It is highly probable that, if Section 86 relief is not curtailed, it will become the vehicle of choice for [inheritance tax] when passing on wealth to the next generation,” it said.

The briefing note explained that tax professionals had immediately acknowledged the possibility of tax “avoidance” when the new exemption had first been introduced as far back as 2000.

Figures for 2005 showed that properties with a value in excess of €1 million had been inherited entirely tax-free on 19 occasions and given as gifts tax-free on four occasions.

The briefing note mentioned two sisters, who were both given tax-free gifts of houses, one of which was worth €2.25 million. Other cases involved houses worth up to €10 million.

It said the system in place now, “allowed parents to purchase a house for a child to live in, and on the death of the parents, the child inherits the house tax-free. To all intents and purposes, this is a mechanism for the tax-free passing on of wealth.”

The exemption generally only benefits high-wealth individuals as they are best positioned to purchase a second property outright for their children.

The Revenue Commissioners again drew attention to the “much abused” exemption in an email to the Department of Finance in August of last year.

However, no changes were made in Budget 2016 by Finance Minister Michael Noonan to tighten up the system and ensure it could not be taken advantage of.

The government did however, manage to tighten up the rules on the gifting of cash payments by parents to children in late 2014, which was an option that was also open to middle income earners who supported their children with money.

The Revenue Commissioners said: “[Our] responsibility is for the fair and impartial administration of the tax legislation in place, and responsibility for tax policy rests with the Minister for Finance and the Government. Revenue has no further comment to make in this regard.”

An edited version of this story appeared in last week’s Sunday Times.

The documents concerned are below

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UPDATE: The Department of Finance has said the inheritance tax loophole will be looked at this year.

A spokesman said: “The legislative provisions relating to the CAT dwelling house exemption were last amended in Finance Act 2007 in order to tighten up on the conditions for benefiting from the exemption in cases involving the gifting of a house. The extent of the current use of the exemption and the case for further amending the conditions attaching to it are being examined by the Department and the Revenue Commissioners with a view to consideration by the Minister in the context of the Finance Bill later this year.”

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