Whistleblower warned that abuse of inheritance tax loophole used by the wealthy was about to take off

The Department of Finance failed to act on warnings from a whistle-blower in the “wealth management” industry who told them a loophole in inheritance tax law was being rampantly abused by high-wealth individuals.

The unidentified wealth manager had a meeting with officials from the Department of Finance after discovering evidence of suspicious transactions where individuals had gifted houses worth €1 million or more to their children without paying a cent in tax.

Even before that meeting took place, a detailed submission had been prepared for Finance Minister Michael Noonan by his own officials warning of the scale of abuse.

However, Minister Noonan – for reasons that are not explained in documents released under FOI – opted to do nothing to close the loophole. The submission seeking a change is bluntly marked: “No.”

Noonan Decision

The Department of Finance were also contacted by the office of Tánaiste Joan Burton, who had been contacted by a concerned constituent.

That constituent had described a number of cases where people were missing out when trying to buy houses, which ended up being bought by wealthy individuals for their children as a tax avoidance measure.

A proposal to restrict the availability of inheritance tax to a single primary residence had already been put forward in the Department of Finance in 2014 but Minister Michael Noonan decided against reforming it.

It explained how wealthy parents were using the loophole.

Cases Attention

In January 2015, officials from the Department of Finance met with an unnamed wealth manager who told them the loophole was bringing the law “into disrepute”.

He told them that in the previous eighteen months, abuse of inheritance tax had “taken off” where high-wealth individuals were buying houses in cash.

The wealth manager told them of a case involving one family, where the parents had bought each of their four children a house worth more than €1 million and gifted it to them entirely tax-free.

In a follow-up email in February, he wrote of further cases he had come across.

Whistleblower Warning

Two months later, a decision was made that reform of the inheritance tax loophole would not be included in the Finance Bill for the budget that took place in late 2015.

“One of the reasons for this was a view that the collection of data and evidence necessary in order to take a view on the need for and scale of any changes to the existing provisions might not be available in the truncated timespan available,” it said.

However, other emails released under FOI show how both the Department and Revenue Commissioners were fully aware of numerous cases of blatant abuse.

Under the rules, the person who is “gifted” the house must be living in the property for three years, and is supposed to remain there for a further six years afterwards.

9.5M Gift

Another case concerned three siblings, each of whom received – or was about to receive – a house tax-free from their parents.

In two out of the three cases, it was discovered that the houses had actually ended up being rented out because the new owners had gone abroad to work.

One of them was gifted a house worth €850,000, which was subsequently rented out for close to €3,000 a month while they worked abroad as “a condition of [their] employment”.

A second one of them was given a house worth €1 million, which was also rented out for €5,500 per month. The person involved was again working abroad and again stated that was a “condition of [their] employment”.

The third sibling had been gifted a house by their parent, and almost exactly three years later sold it for close to €700,000.

The documents also reveal that the Department of Finance has at last begun a closer examination of inheritance tax abuse.

A senior official explained in an email in March: “One of the things they [Revenue] were keen to do was show me examples of, among other things, abuses of the dwelling house exemption.”

A statement from the Department said: “This issue is still under consideration and it is not the case that a final decision has been taken or that there is no potential for movement here.

“The Department has previously been contacted by a member of the public with information regarding ways in which the exemption may have been used for tax planning. The Department is grateful for this assistance.”

You can read the full set of documents (with my redactions for personal email address, phone numbers etc) below.

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