There is an urgent need to reform capital acquisitions tax, the tax levied on gifts and inheritances. Because of the surge in Dublin property prices, many bereaved adult children now risk losing their former family home when their parents die.
Inheritance tax is a stealth tax. The amount levied on citizens can surge automatically if the value of the taxed property increases. Tucked away in the small print of Budget 2015 is an estimate that revenue from this tax will increase by 21% this year, to €400 million.
During the economic crisis, inheritance tax rates were dramatically increased and thresholds were slashed. A child who inherits from his or her deceased parent now pays 33% tax on any part of the inheritance which exceeds the threshold of €225,000, up from 20% before the crisis. Thresholds are now at the same level as they were in 1995. The child’s principal private residence can be exempt from the tax, but only provided certain conditions are met.
It was appropriate for successive governments to reduce tax thresholds while property prices were dropping. However, prices in parts of Dublin have risen sharply since the last change. There is now an urgent need for increases in the threshold at which tax applies.
More fundamentally, the stealthy nature of inheritance tax needs to be addressed by restoring the system of indexing thresholds. When property prices go up or down, tax thresholds should automatically increase or decrease by equivalent amounts.
The current thresholds are set so low that they impose unjustifiable tax burdens on families. There are many properties in Dublin whose value now exceeds €225,000. A growing number of people face the prospect of losing their former family homes to pay punitive inheritance tax bills.
The following example illustrates the problem. Say the parent of two children died in November 2014 leaving them a house in Terenure which has recently become worth (on paper) €700,000. The (adult) children do not live in the house. At current thresholds, the two children will each have to pay almost €41,700 in inheritance tax.
If that parent had died in April 2013, the same house would have been worth (on paper) about €500,000. The tax payable by each child would have been about €8,300.
This illustrates the capricious character of inheritance tax. The surge in property prices has led to almost a five-fold increase in the tax payable in less than two years. If prices go back down again after the parent’s death, there will be no corresponding reduction in the tax owed by the bereaved children.
As an interim measure, the threshold should return to the level which applied in 2000, which was €381,000. That is a modest proposal, given that current Dublin property prices are well above 2000 prices. If we restored the threshold which applied in the year 2000, the adult children in the above example would not pay inheritance tax.
This proposal would raise more tax than was raised in 2000, because the rate of inheritance tax is much higher now than it was then. Those who inherit significant assets over and above their parents’ home would continue to pay very significant taxes.
Beyond the immediate need to restore some fairness to inheritance tax thresholds, there is a wider need to reform the structure of Ireland’s suite of property-based taxation, including stamp duty and the local property tax. The combined effect of these taxes is to hammer families. Members of the same family may end up paying large amounts of all three taxes if property is purchased by one family member who dies and bequeaths it to another. We need to end this lottery, whereby an unlucky few families pay a disproportionate amount of tax because of the untimely death of a family member.
These are taxes that are subject to wild variations. When property prices slump, the exchequer faces shortfalls. When prices jump, these taxes increase in a disproportionate manner, as the above example illustrates.
Ireland needs a taxation structure which provides a fair, stable and relatively predicable contribution to the exchequer by taxpayers. No citizen should face a crippling tax bill when circumstances outside their control cause their property to increase in value.
Ireland’s emergence from a long financial crisis gives us an opportunity to reorganise our economy. A necessary part of this reorganisation is to fundamentally restructure the way we levy taxes on property. Pending more radical reform, we need to increase inheritance tax thresholds and index them to property prices.
Jim O’Callaghan SC is a Fianna Fail Dublin City Councillor and Legal Adviser to the Fianna Fail Frontbench