No taxation without respiration

May 21, 2018

Sunday Business Post, 20 May 2018
The tax system has a tendency to be dispassionate.  Most tax issues are in black and white with few enough shades of grey in the routine which occupies most tax compliance work.  

Inheritance tax though is different.  It is charged at a time when people are often vulnerable following a bereavement and thus can be a source of disproportionate worry.  Timing aside, any nation as sensitive to property rights as we are will always be suspicious of any tax levied on property or inheritances.  Inheritance tax is a tax which can break up family businesses, residences and, worse, family ties in the course of being paid. 

Relationships

The key characteristic of inheritance tax that gives rise to these problems is the way it is calculated.  Uniquely among the taxes, the critical factor is not the timing or even the amount of the inheritance, but the relationship between the giver and the receiver.  An inheritance from a stranger will be more heavily taxed than an inheritance from a parent.  Essentially anyone outside the immediate family is treated as a stranger and only a small amount of an inheritance from a stranger is exempt from tax.  One third of anything above that threshold goes to the Revenue.  The tax on gifts is calculated more or less the same way as inheritances.

This emphasis on the relationship between the giver and the receiver often doesn’t reflect the situation behind the inheritance or gift.  Lifelong friendships, second relationships or decades of good neighbourliness are not recognised by the tax acts as mitigating factors in calculating the amount of tax which will be charged.  

Manoeuvres

Towards the end of last year it was reported that two elderly male friends had married to forge a relationship intended, in part, to reduce future inheritance tax charges.  Gifts and inheritances between spouses attract no tax charge.  If that was the case, the marriage as it was reported is yet another element in a compendium of manoeuvres made by people over the centuries (taxes on inheritances go back a long way) to reduce the taxman’s future share in their demise.  These steps have ranged from anything between buying graves in a preferred low inheritance tax jurisdiction to creating labyrinthine legal structures using trust law. 

Maybe this is one of the reasons why inheritance tax generates very little revenue for the Exchequer.  It is one of the smallest taxes.  Figures published by Revenue this week give a breakdown of the total inheritance and gift tax collected (together known as capital acquisitions tax) is a total of €460 million.  While €460 million is not an inconsequential sum, in the overall scheme of things it is a tiny element of the total Irish tax take.  Inheritance and gift taxes bring in less than local property tax.  A yield of €460 million is in the Exchequer margin-of-error territory making up less than half of 1% of the overall total collected. 

Death Taxes

So are gift tax and inheritance tax worth the bother?  Not everyone seems to think so.  President Trump wanted to abolish what he termed “death taxes” as part of his tax reform programme last year.  That didn’t happen, but there were significant increases to the size of estates before tax applies under new US rules.  Across the EU, the trend has been to reduce the rates, or reduce the tax bases for these taxes in recent years.  Further afield The Economist newspaper recently listed Australia, Canada, Russia, India and Norway as among countries that have abolished death duties.  Yet gift and inheritance taxes persist here, perhaps more for social reasons than strictly economic ones. 

The same national sensitivity to property rights can also extend to inherited wealth.  There is a sense that income tax which arises from hard work and effort should be mitigated by taxes on gifts and legacies.  There are always begrudgers, whose preferred mode of taxation is the type that other people pay.   It would be a hard sell for any politician to completely abolish inheritance tax, which mightn’t even be a vote getter.  Yet it would constitute a meaningful benefit for very many people, if not immediately then in future years. 

At some €30 million the yield from gift tax is tiny, and possibly its only role is to prevent oligarchs from choosing Ireland as a preferred location from which to make gifts.   But inheritance tax needs to be rethought.  Because it collects so little, it fails as a revenue raising measure.  Because it is usually a death which triggers the charge, it is needlessly intrusive on the personal circumstances of the citizen.  The probate tax system, a fixed levy on the value of estates which used to apply in this country, shows that other approaches to taxing inheritances are feasible. 

Meaningful reform of inheritance tax would probably have to involve its complete replacement.  Only such a replacement tax would stop linking the deceased and the inheritor when making the calculation, which is critical if the tax is to be fairer and more dispassionate.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland