In the upcoming budget, a reduction in inheritance tax is expected, most likely achieved through an increase in tax-free thresholds. This suggests that one of the limited wealth taxes in Ireland will be eroded. Despite an increase in tax revenue being the recommendation of financial specialists for the forthcoming decade, the boost in corporate taxes currently supports the treasury for now, indicating that a reduction in inheritance tax payments is an impending certainty on budget day. The quantum of the reduction remains uncertain.
Public opinion about taxation is peculiar; they generally support policies that promote equality and impact the affluent. However, when the conversation turns to inheritance tax, sentiments change; people often argue it constitutes “double taxation” and infringes upon their rights to bequeath their “hard-earned money”. As a result, Fine Gael identified and capitalised on this taxation aspect, which invariably affects a minority in any significant manner, as a policy shift that could appeal to their voters. This action was promptly endorsed by Fianna Fáil, with Tánaiste Micheál Martin asserting that it excessively burdened the “average family”- an inaccurate claim, considering that the average inheritance stands at around €100,000 and falls substantially below the tax-free threshold for children. While there are areas in need of reform, such as cohabitating couples who are neither married nor in civil partnerships and don’t receive any specific relief, such anomalies are often utilised to advocate for universal relief. The overflowing treasury may lead the Coalition to succumb to reducing the inheritance tax.
People generally view wealth taxes favourably, inspite of often not considering themselves wealthy. However, inheritence tax specifically triggers strong public dislike, not only in Ireland but internationally too. A consistent 2019 YouGov poll in the UK indicates that 50% of the populace considers inheritance tax as “unfair” or “very unfair”, a stark contrast compared to the 20% who view it as “fair” or “very fair”.
The factors contributing to this phenomenon are not entirely understood, but it’s likely influenced by economic opposition from wealthier individuals – as they are the most affected – and a sense of duty to provide financial security to family, particularly children. It may be partially driven by the role inheritances or gifts play for relatives looking to purchase property in Ireland in 2024. People’s personal viewpoints undoubtedly play a role too – as exemplified by ex-minister Alan Shatter, who has described inheritance tax as “officially sanctioned tomb looting.”
In reality, inheritance tax is neither ‘excessive’ nor ‘tomb looting’. There are no valid reasons to demand a cut in it. The question arises as to why home prices keep inflating despite being increasingly out of touch with average wages. Likewise, it’s anticipated that the financial pressures on parents seeking child care will amplify next month. Can Sinn Féin’s housing strategy be a solution to young buyers’ housing crisis?
Public opinion shows a strong aversion to tax modifications that appear as losses rather than sharing a percentage of profits, says Pete Lunn, behavioural economist at ESRI. Taxes that are less noticeable also seem more acceptable. Lunn, for instance, observes that a hike in the standard VAT rate from 21% to 23% during times of austerity generated lesser political backlash. This tax was an unnoticed fraction attached to purchases, unlike the up-front payment required by household and water charges.
In terms of the inheritance tax, the Irish taxpayer who also happens to be the beneficiary, is receiving a large sum, often seen as ‘family money’ that has already been taxed. Understandably, making a direct, potentially large, payment to the Revenue department is detested by many, despite the fact that few will typically be subject to it.
This isn’t a uniquely Irish issue. A comprehensive OECD analysis suggests that the relevance of inheritance tax as a revenue source has dwindled globally, with some developed nations either scrapping or easing the tax.
As acknowledged by the Tax Commission, Ireland imposes a relatively low taxation on wealth, with an estimated rate of 14.5% on capital, significantly below the European Union’s average of over 26%. There are abundant tax exemptions in the Irish tax system, especially in the realm of capital tax- notably on family properties. As tax professionals have noted, death operates as the ultimate legal tax evasion; the increase in value on assets that a person holds is not subject to capital gains tax. However, inheritance is not tax-free; recipients must pay, although with a generous threshold of €335,000 for descendants, many inheritances incur minimal tax. This results in the burden of inheritance tax primarily falling upon other family members or friends who are inheriting, with significantly lesser allowances. Moreover, a substantial portion of Ireland’s wealth remains untaxed.
There are also particularly generous policies for inheriting farms and businesses, which often eliminates the majority of potential liabilities. From a standpoint of equality, the argument for a heavier wealth tax is forthright, although the influence of inheritance on inequality is complex. The commission has offered various suggestions for this, however, without the pressure of a public finance crisis, these changes are unlikely. The last significant increase in inheritance tax followed the financial crash, when rates rose to 33%.
For now, this may seem acceptable. However, unless corporation tax continues to rise exponentially, the public finance situation will begin to tighten due to an aging population, climate change, and increasing costs of state services. Ireland should be foreseeing and preparing for these challenges, but in the current political climate, this is unlikely. The burden will likely fall on the younger generation, who may be forced to carry future bills through increased income taxes. Wealth and property taxes are less economically harmful but politically contentious.
The significant rise in corporation tax has protected Ireland over recent years, making necessary compromises disregarded. This means those advocating for a reduction in inheritance tax are not required to suggest how it should be resourced or how it fits into Ireland’s long-term public finance strategy. Given strong public sentiment on this issue, plenty of available capital, and an approaching general election, they face few obstacles.