Hello again for those of you who have yet to escape on holiday or for whom that break is now just a fading memory.
It may seem a bit maudlin at a time of year when the focus is on enjoying quality time with family but inheritance has suddenly become a “big issue” in advance of Budget 2025. As almost always in Ireland, the debate has been triggered once again by house prices, more specifically Dublin house prices.
Several prominent Fine Gael figures as well as some backbenchers across both of the bigger Government parties are pressing for more liberal rules, essentially allowing people to inherit more without being exposed to tax. Others go further and say that as the now dead owners of these properties and other assets paid full tax on their assets in their lifetime, there should be no such thing as inheritance tax.
On the other side are those who note that while the original owners may have worked for their assets, the beneficiaries are receiving a financial leg up when inheriting assets they never worked to earn. Then there is the social cohesion argument which says, among other things, that the nature of wealth and inheritance is such that, even when taxed, it widens the already growing divide between the haves and the have nots.
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So what are the inheritance tax rules in the first place?
In Ireland, it is beneficiaries who may be subject to tax on any inheritance or valuable gift that they receive. This, unusually, puts us at odds with the UK, for instance, where it is the estate and not the individual beneficiary who is taxed.
But everyone has a tax free allowance in relation to inheritances and/or gifts. How big that allowance is depends on the relationship between the donor and the beneficiary.
Top of the tree are children inheriting from their parents. This is called Category A and under the current tax free threshold, a child can receive inheritances and / or gifts from their mum and dad of up to €335,000 without having to pay tax.
When I refer to gifts, a “large gift” is anything in excess of €3,000 in any one year. Anything below that is covered by separate tax relief called the small gift exemption.
If the parents leave something to a child who has predeceased them but who themselves had children and they are still under the age of 18, those grandchildren can benefit from this threshold. This group can also apply to parents who find themselves in a position they hoped never to see – inheriting from their children.
Next comes Category B. This covers large gifts and inheritances from close blood relatives – so great-grandparents, grandparents, uncles, aunts, brothers and sisters.
When they say uncles and aunts, they means your parents’ siblings not their spouses or partners – people most of us would also refer to as uncles or aunts. Equally, though we might consider first cousins to be close relatives, they are not at least as far as inheritance tax is concerned.
The threshold for this group is much lower – just €32,500.
Everyone else falls into Category C, which is effectively “strangers in blood”. That includes relatives by marriage and cousins as mentioned above. It also includes, more obviously, friends and also in-laws. Yes, you may get on famously with your father-in-law and he may leave you something in his will but as far as Revenue is concerned, you are strangers even if you might have cared for him in his declining years.
The Category C threshold is just €16,250.
On their own, those limits might not seem too onerous for most people. However, they are cumulative. That means every large gift or inheritance you have received from a close blood relative (Category B) since December 5th, 1991, must be totted up when assessing whether you are liable to tax.
That’s 33 years ago, and it might be a lot longer by the time you inherit as there is no suggestion the Government is going to bring that date forward.
Declaring past inheritances
Can you recall what you received from great-aunt Wilma when you were a child at a time many years later when your mother-in-law decides to leave you a valuable diamond ring?
That is why the Department of Finance suggested in the recent Tax Strategy Group papers that people should henceforth be obliged to notify the Revenue Commissioners every time they receive an inheritance – regardless of its value and from whom – or a gift in excess of €3,000. The thinking is that this will help Revenue keep tabs on things and ensure that people don’t fall foul of their tax liabilities simply because they no longer recall an inheritance or gift received many years previously.
The suspicion is that Revenue has a strong view that people are maybe being less than upfront in terms of declaring their tax liabilities in this area on the back of a number of relatively modest inheritances which bring them over the relevant limit.
As of now, you are only required to notify Revenue when you hit 80 per cent of whichever is the relevant threshold. No tax is due at that time obviously but it is designed to put you on Revenue’s radar should you inherit again.
The current political furore over capital acquisitions tax (or CAT as inheritance and gift tax is more formally called) tends to be framed in terms of distraught children having to sell the family home they were left by a loving parent. But how valid is this?
First up, the group that accounts for the largest amount of inheritance tax paid is not these Category A orphans but rather those in Category B.
In 2023, the last year for which figures are available from Revenue, Category B accounted for almost 46 per cent of the total CAT tax take, compared to just over 42 per cent for Category A.
In terms of liability to tax, the numbers under Category B (14,237 cases) was comfortably above the combined totals for the other two groups.
This has been the position for the past decade. In terms of overall tax take, inheritance tax accounts for less than 1 per cent of all taxes collected by Revenue each year – €634 million in 2023, according to that Tax Strategy Group paper. That sum is rising by around 4 or 5 per cent a year which does not suggest a dramatic surge.
The Central Statistics Office did a study on the Intergenerational Transfer of Wealth back in 2020. The findings were interesting.
Just over one-third of Irish households had benefited from an inheritance or substantial gift at some point, though those figures are skewed by the financial status of the families. Closer to two-thirds (63 per cent) of the most wealthy fifth of the population benefited while the figure was a distinctly more modest 16 per cent among the poorest fifth. Most (70 per cent) came from parents to their children.
The figures support anecdotal evidence that people more often inherit at a later point in life when they are already fairly well established. Just over a quarter of people under the age of 35 had received an inheritance or a large gift – a group that presumably includes the beneficiaries of the bank of mum and dad when it comes to financial help in buying their home.
But the group most likely to have benefited was those in the 55 to 64 age bracket, where 46 per cent had received at least one inheritance of substantial gift.
The median size of such inheritances was a relatively modest €80,200, though that figure rises to €100,600 for inheritances from family.
In terms of the current focus on “being forced to sell the family home”, it is worth noting that just 8 per cent in the 2020 study were bequeathed the home they currently lived in, while 7 per cent were left a property other than their home and a similar number were left land. In some cases, those will be the same people.
Older households inherit more
Interestingly, the median inheritance received by people who already owned their home was over four times greater than those who rent, where the median was just over €24,000 – a figure that does not suggest this group was inheriting a needed home. The gap between homeowners and rented in terms of the scale of substantial gifts was even wider.
Commenting on the figures at the time, CSO statistician Brian Cahill said: “The likelihood of having received an inheritance or gift increases if the household is older, has a higher level of education or has higher income.
“The older the household, the more valuable inheritances and gifts received are likely to be,” he added.
So on that evidence, people inheriting on average tend be older, to already own their home and, in any case, to receive sums that are not substantial enough to trigger a tax liability on their own. While there may certainly be some hard luck stories, the wider picture suggests that inheritance tax is not a big issue unless you (a) receive a very large inheritance or (b) are blessed with a very large family all of whom are inclined to leave something for you.
A bigger issue has been the failure to adjust the tax free thresholds over time. At one point, there was a move to index-link CAT with the consumer price index. This would still not have insulated people entirely as property prices at that time were surging well in advance of the general consumer price index but it would have been something.
The financial crash of 2008 put paid to the notion of index linking as the government of the day scrambled to raise money to meet the State’s then crippling debt.
Tax-free thresholds
Back in early 2009, the tax-free thresholds peaked at €542,544, €54,254 and €27,127 respectively. From that point, they were cut several times so that, by 2012, they had fallen to €225,000, €30,150 and €15,075.
They stayed there for until late 2015 when the government moved to increase them once more. Over the following four years, they were ratcheted up in stages to reach the current levels but there has been no increase in the tax free threshold since October 2009. The Category B and C thresholds have been stuck at the current levels for even longer – since October 2016.
Back in 1989, the tax free allowances seemed more modest at the equivalent of €190,461 for Category A, €25,395 for Category B and €12,697 for Category C. But the impact of inflation over the intervening years means those allowances were, in fact, considerably more generous than what is available now.
That €190,461 limit under Category A would be worth close to €510,000 in today’s money. Under Category B, €25,395 in 1989 is worth €67,800 today while the lowest Category B threshold limit would be worth just shy of €34,000.
At the same time, the actual tax rate has increased. Back in 2008, the inheritance tax rate was just 20 per cent as it had been since 1999.
In November of that year, it was increased to 22 per cent and then to 25 per cent the following April. In December 2011, the rate jumped again – to 30 per cent – and to 33 per cent a year later. It has stayed at this level since then.
So there is certainly an argument that just to stand still, the current thresholds should be increased by a decent amount. At one point, former taoiseach Leo Varadkar announced an intention to raise the Category A rate to €500,000. He was oddly quiet on the other thresholds, interestingly.
But those commitments were quietly dropped subsequently and little was said on the issue of inheritance tax until the past month or so.
The problem then, if there is one, relates really to single people who do not already have a home and who inherit the family home in the commuter belt counties around Dublin and also in Co Cork. This is very much a small cohort, especially given the CSO evidence and the average family size in Ireland.
And some of those people will also be covered by the dwelling home exemption that means people inheriting a family home where they have lived for three years before inheriting and who do not own any other properties do not pay any tax on the inheritance regardless of the property value.
Quite why so many politicians are getting exercised on behalf of such a small number of potential voters is puzzling, unless they are playing to the visceral Irish attachment to the concept of inheritance – even where they are unlikely to inherit to any great extent themselves.
The Tax Strategy Group paper suggests that any move – aside from greater regulation of reporting to Revenue – will focus either on cutting the tax rate or increasing the exemption.
Each percentage point cut in the rate of tax from the current 33 per cent is expected to cost the State €20 million in lost tax revenue in a full year. Increasing the Category A threshold by €15,000 to €350,000 would cost €15 million while it would cost €52 million for a significant increase to €400,000.
The cost to the exchequer of adjusting the other bands is even more modest. Moving Category B from €32,500 to €33,000 would cost just €2 million, a figure that rises to €5 million at €34,000 and €9 million at €35,000. On Category C, every €1,000 increase in the threshold would cost the State around €1 million.
Quite what happens when Jack Chambers stands to make his maiden budget speech on October 1st, we will have to wait and see.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
