There should be a “substantial” reduction in the amount of money parents can leave their children tax-free, a government-appointed tax commission has recommended.
he proposal will prove hugely controversial as estate tax issues are emotional and any move to make changes tends to generate huge backlash.
Last November, Finance Minister Paschal Donohoe was forced into an embarrassing U-turn on a budget measure to tax soft loans for mortgages given by parents to their children.
Now, the Tax and Welfare Commission is set to recommend that the tax exemption threshold for inheritance tax be dropped dramatically over the next few years.
A sharp reduction in the tax-free threshold would be particularly problematic in South Dublin, where homes often sell for over €1million.
Under Capital Acquisitions Tax (CAT) rules, a child can inherit €335,000 from their parents before having to pay 33% tax.
In 2009, a child could inherit or receive €542,544 from his parents before having to pay taxes, the rate then being 22%.
The commission does not give a figure on what the tax exemption threshold should be, except that the reduction in the threshold should be
The commission’s report is to be released by Mr Donohoe on Wednesday and this proposal will prove to be one of the most controversial.
The commission is not asking for any of its recommendations in this month’s budget, but rather wants its recommendations to be implemented over a 10 to 15-year period.
The tax exemption threshold is €32,500 for other close relatives and €16,250 for more distant relatives or friends.
The recommendation is that the “group A” threshold, for a €335,000 child, should move closer to these other two thresholds over time.
In the past, the government has defended the size of the tax exemption threshold for children.
He argued that since the family home is the main element of an estate, a lower threshold would force children who inherit it from a parent to sell the home to meet the tax liability.
Relentless house price inflation has led to a growing number of families, especially in Dublin, facing big CAT bills because the houses they inherit – even the most modest ones – are worth way more than the threshold. tax exemption of €335,000.
And in another controversial move, the commission is recommending that the level of agriculture and business exemption from the CAT tax be changed.
Under this relief, the market value of a qualifying property or farm is reduced by 90% when calculating tax on a gift or inheritance.
The commission wants this to be reduced to 80%, arguing that such a change would still exclude the majority of farms from the tax.
The commission also advocates a “modest charge” if a parent donates more than €3,000 a year to a child.
What is known as the Small Gifts Exemption under the CAT scheme allows a parent to give up to €3,000 a year to a child without paying the 33% tax . A child of two parents can receive €3,000 from each per year, tax-free. Amounts over €3,000 are deducted from the child’s lifetime tax exemption threshold of €335,000.
It is argued that this will help tackle tax evasion and ensure that the tax administration has a better track record of wealth transfers.
On the side of social assistance, the commission advises to keep family allowances, but not to tax them. He wants increased child benefit rates for low-income households, on a phased basis.
And it calls for working family pay to be available to all households, not just those with children.
This is about addressing labor market distortions and ensuring that there are no disincentives to accepting paid work that is integrated into the social protection system.
The general thrust of the report’s 100 recommendations concerns property and wealth taxes and the taxation of goods that pollute, rather than income taxes.