Potential future inheritance tax changes

In the context of the Covid-19 pandemic it would appear likely that governments throughout the Organisation for Economic Co-Operation and Development member countries (OECD), may seek different mechanisms to increase tax revenue over the coming years. It is likely that when deciding how to increase revenue, the Irish government will turn to sources like the OECD’s recent report on Inheritance Tax.

The report, released in May 2021, outlines a comparison of the inheritance tax policies of 38 member countries of the OECD and addresses how inheritance taxation could raise revenue for governments, as well as improving efficiency and addressing wealth inequalities.

Individuals will need to address how a possible increase in inheritance tax or decrease in inheritance/gift limits may affect their future tax planning and cashflows.

Ireland’s Inheritance Tax

Ireland currently has a Capital Acquisitions Tax (CAT) rate of 33%, making it one of the 24 OECD member countries that has chosen to tax transfers of wealth between individuals. This has increased by 13% in the past 13 years, from 20% in 2008, however this has been as high as 60% pre-millennium.

A similar trend can be seen in the lifetime thresholds provided to taxpayers, which have decreased significantly over the past 13 years following the 2008 economic crisis in a bid to increase Government revenues. Subsequently, the tax-free lifetime allowance for transfers of wealth in Group A (gifts/inheritances from parents to children) dropping from €521,208 in 2008 to a current threshold of €335,000. 

It may be likely that the government may take a similar approach now following the pandemic in a bid to reduce the deficit following increased Government spending, however it should be noted that this is often an unpopular political choice. In countries such as Australia, New Zealand, Sweden and Norway the political unpopularity of these government initiatives led to the abolishment of tax on wealth transfers entirely.

The Irish Government may look at what is done in other similar countries when deciding any changes to the current inheritance tax rates or thresholds, however it is highlighted in the OECD report that Ireland is the only country in the OECD that chooses to have thresholds that combine gift and inheritance taxes over a lifetime period. This differs to countries such as the UK and US where inheritance tax revenue is generated through levying estate taxes on deceased donors, with the UK taxing inheritances through the estate of the deceased at 40% with a tax free threshold of STG£325,000, and the US taxing estates on varying rates depending on the estate’s taxable value, with a top estate tax rate of 40%. It should be noted that US tax is only paid on assets greater than USD$11.7 million per individual, if they are a US citizen.

The OECD have also outlined in their report the advantages of using inheritance tax as a means for governments to combat wealth inequality, as they state that most of global wealth is inherited.  

While it is not certain that this is an area that the Irish Government could target, such a change would be a simple move that would generate additional exchequer funds while also addressing perceived inequalities and improving efficiency in terms of wealth taxes. As such, it would be important for individuals to take into account the possibility of changes to the capital acquisitions tax rate and thresholds when considering inheritance tax planning for the future.

Budget 2022 is due to be announced later this year and it is possible that any changes to Capital Acquisitions Tax could be announced effective from Budget day.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars private client team below:

June 2021