MAKING CHANGES TO the inheritance tax framework “may now be appropriate”, according the Department of Finance’s Tax Strategy Group (TSG).

However, a suggestion has been made to government that legislation should be introduced to make it mandatory to file a tax return on all inheritances and gifts, no matter how small.

Reform of the inheritance tax system is on the table in this year’s budget, with Taoiseach Simon Harris telling The Journal that reforms to the tax “deserve to be considered” in the run up to October’s budget. 

He added that there were “unfairnesses” and “anomalies” that need to be addressed. 

Under the current rules, children are able to inherit €335,000 from their parents before they have to pay tax at 33%.

Increasing the tax threshold before children have to pay inheritance tax to €400,000 will cost €52 million to the Exchequer, according the group’s paper.

Outlining options for reform, the report stated “it may now be appropriate” to consider how the framework can be amended to simplify the regime and “make it more efficient from a taxpayer perspective”.

Declaring gifts when received

Somewhat a suggestion from the sideline, the tax group suggested introducing legislation whereby any gifts or inheritance would have to be declared in a return to Revenue. 

It stated that a person often receives gifts and inheritances over the course of many years which substantially reduce the threshold amounts available to them, which Revenue are also not aware of in their records.

“The requirement for individuals and their accountants or tax advisors to retain
records over such a long period gives rise to data protection concerns as there is a
greater possibility for such records to be lost.

“The current record retention requirements place a significant burden on taxpayers to retain detailed records over a long period of time,” the report stated.

One possible solution could be to provide in legislation that the receipt of any benefit that reduces the appropriate Group threshold be reported to Revenue, it stated. 

“As Revenue would be in receipt of such returns the requirement for individual taxpayers to retain records for decades would be eliminated for any taxpayer who files such a return with Revenue.

‘This could be further complemented by amending the legislation to specify that a
beneficiary of the more significant exemptions and reliefs available under the CAT
framework would be required to file a CAT (Capital Acquisition Tax) return to notify Revenue that they have
self-assessed that they are entitled to the relief or exemption in question,” stated the group. 

It is worth noting that gifts you receive up to the value of €3,000 from any person in a calendar year are exempt from CAT. This means that you may take a gift from several people within the same year, with each person gifting that amount. Two parents could gift €6,000 to one child in any year free of CAT. 

Paper trail

The approach suggested to government would significantly reduce the record-keeping requirement currently in place for individual taxpayers, stated the tax group.

It would also have the ancillary benefit of improving the statistical information available in relation to CAT and the various reliefs available and provide enhanced data to inform the policy development process, it added. 

The options paper stated that it has long been policy to have the Group A threshold, which applies to children and inheritance, higher than other groupings, such as inheritance between brothers and sisters, for instance.

Addressing the issue of the 33% rate, the TSG states that it “can help maintain a balance between the rate of taxation of capital assets and the higher rate of income tax and prevent tax planning behaviour”.

The group said there are options for amending the scope of the tax, including changing the rate of the tax, amending or abolishing existing reliefs and exemptions, or considering the introduction of new reliefs or exemptions.

In terms of the cost of changing the rate by 1%, a reduction or increase is estimated to be €74 million in a full year. A 5% reduction in a single Budget would have an Exchequer impact of €372 million.