In a well-telegraphed move, the Minister for Finance has announced an increase of €55,000 in the tax-free threshold which applies to gifts from a parent to each of their children. The threshold now stands at €280,000, and applies in respect of gifts or inheritances received on or after October 14, 2015. In monetary terms, this increase in the tax-free threshold equates to a tax saving of €18,150.
While an increase in this threshold is welcome, the level of the increase is somewhat underwhelming, and certainly less than had been hoped for in the run-up to the budget. Nor was there any reduction in the capital acquisitions tax (CAT) rate, which increased from 20 per cent to 33 per cent over the last six years (ie a 65 per cent increase in the rate).
In his speech, Michael Noonan acknowledged that the parent/child tax-free threshold was reduced substantially during the financial crisis, from a high of €542,000 to a low of €225,000, and that this reduction was required to maintain the yield from CAT while asset prices were falling during the crisis.
The minister indicated that the recent recovery in asset prices had allowed him to increase the threshold while still maintaining the yield from CAT. Doubtless this explanation is plausible to a point, but one would suspect that increases in asset values will exceed the increase in the threshold, meaning that CAT yields will actually increase in future years, unless compensating increases in the threshold occur.
As many readers may recall, CAT was originally established as an inheritance/gift tax for the very wealthy. The tax-free threshold between a parent and a child was the equivalent of €190,461 when the tax first applied in
If indexed at the rate of CPI since then, this would equate to €1,281,474 today. However, the new tax-free threshold of €280,000 is less than one quarter of that indexed 1975 threshold.
Furthermore, when CAT was first introduced, it would have not have been uncommon for parents to have five children, and if indexed thresholds applied today, it would mean that an equally divided estate of €6.4 million would not be within the CAT charge, whereas today a CAT liability would arise for an equally divided estate above €1.4 million (again assuming five children).
Where CAT does apply, it has a significant impact on the families of the deceased, but in terms of the amount of tax collected from CAT annually, the impact on government finances is small.
At its height in 2007, the amount collected from gift and inheritance taxes was €390 million, and after an expected drop in collections during the financial crisis, the 2014 tax take recovered to €356 million.
This is less than half of the annual cost of the Budget 2016 reduction in the USC charge which produces a small but welcome tax reduction for most taxpayers.
A more progressive increase in tax-exempt thresholds would go a long way to removing reasonably modest estates from a charge to CAT, and a reduction in the tax rate would help reduce the level of tax payable for modest estates exceeding the relevant thresholds.
Having said all of the above, it is important to recognise the many positive changes to the CAT regime over the last 20 years.
This includes an exemption from CAT for certain dwelling houses which can apply when certain conditions are met.
It should also be recognised that when CAT was originally introduced, there was limited relief on passing family businesses/family farms to the next generation.
Current CAT law now recognises the very important contribution that those businesses have made, and will continue to make (assuming they are not hindered by large CAT debts) and provide substantial reliefs where those businesses are passed between family members.
Rome wasn’t built in a day, and it is clear that budgetary and political constraints played a part in the limited, but welcome, CAT measures introduced in Budget 2016. We would hope that the current government has begun a longer term process of improving tax-free thresholds and that this initiative will be taken on board by the next government.
Whether we will get back to CAT being a tax that applies only to the very wealthy remains to be seen.