Inheritance tax in Ireland, also called Capital Acquisitions Tax (CAT) has been a subject of debate for many years. The discussions around it have intensified as we prepare for October’s budget, with some politicians pushing for reforms. They argue that the present system is too burdensome and unjust especially on those inheriting family homes.
In Ireland, CAT covers both gifts and inheritances. Many people find this frustrating since they spend their entire lives paying taxes, only to burden their heirs with another tax bill after their death. While it is an onerous aspect of the tax system, whether we like it or not, inheritance tax is an unavoidable and harsh reality.
Recently, the issue of inheritance tax in Ireland has drawn attention as people look ahead to the coming October’s budget. Reducing the burden that comes with inheritance tax has become a matter of concern among some politicians alleging that it has become excessively unfair.
A key focus of the current debate is the taxation of the family home particularly when inherited by children. After April 2009, children were allowed to inherit up to €434,000 without having to pay any taxes, and prior to 2008, it was €521,208. However, this threshold was lowered to €335,000 while the rate has increased from 20% to 33% due to the financial crisis. (Revenue.ie)
One major issue is how much property prices have risen since 2012. According to the CSO, by then the average house price in Ireland was €205,476 which has hiked to €335,000 today. Dublin’s median home prices range between €410,000-€626,000 (CSO) far above the current CAT threshold.
Politicians are increasingly aware of the impact of inheritance tax on the so-called “squeezed middle” – those with average or slightly above-average earnings who struggle to get along due to high living costs and significant tax burdens. In this context, inheriting a family home can be a challenge due to the associated tax bill.
Thus some politicians are calling for an increment to CAT threshold to at least €500,000, or even more with a potential increase up to €700,000 along with lowering the CAT rate. The Tánaiste Micheál Martin referred recently to reforming inheritance tax as “on the agenda” for Budget 2025, indicating that the existing system is “too punitive”.
There is always a price to pay any time changes are made on inheritance taxes. For instance if the threshold was raised to €400,000 while retaining the 33% rate, it would cost the exchequer some €52 million annually. Also reducing this rate by 1% would add another 20 million euros yearly. These two adjustments alone will have their own financial implications.
The Minister for Finance, Jack Chambers has limited budget to only €1.4 billion in terms of taxation reductions next year. Most likely these funds will be spent mainly on adjustments of income tax credits and bands so as not to erode workers’ wages through taxation; thus any decrease in inheritance should take into account difficult choices regarding other areas of taxation policy or state expenditure.
Since some people might consider inheritance tax to be a type of wealth tax, they believe that it is necessary to maintain or even increase it. They also argue that property prices have risen significantly over time leading to increased wealth for many people and the majority of individuals do not inherit more than €335,000 hence they pay no CAT. Furthermore, this means that inheritance tax has been accounting for less than 1% of overall net taxes yearly which consequently indicates room for potential expansion in its base.
The introduction of changes on inheritance tax which may be included in the Budget 2025 could resonate with the ‘squeezed middle’ ahead of next year’s general election. Nevertheless, these consequences will come at a financial cost and attract criticism from the public due to other demands from government funds. Therefore, these are complex matters that require making difficult choices by the government.
With the imminent changes and debates on Capital Acquisitions Tax (CAT), it is no wonder that dealing with inheritance tax in Ireland can be a daunting task. Fairstone Ireland specialises in offering professional advice and bespoke solutions on how to effectively manage your estate. Some of our offerings include expert guidance on Section 72 policies covering estate taxes and Section 73 plans, which facilitates saving against future inheritance tax liabilities. Our experienced financial advisors can explain you the advantages along with possible savings or expenditure through these choices thereby protecting your heritage as well as family members against any financial strains.
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