King Charles didn’t pay it on the fortune he inherited from his late mother, Queen Elizabeth II; US politicians have made repeated efforts to repeal death taxes; countries such as Sweden and Austria have gone so far as to abolish taxes on estates altogether.
In Ireland, inheritance tax remains a bugbear for many, with former minister Alan Shatter recently describing it as “State-approved grave robbery”, and others complaining that it is tax on wealth that has already been taxed.
Love it or loathe it, it’s likely here to stay.
Change may be imminent, however, as the Government looks likely to extend the amount children can inherit tax-free from their parents to a figure of about €400,000 in the upcoming budget. A voter-pleasing move, perhaps, but one that might have more of an impact on the hearts and minds of the electorate, rather than on their pockets.
After all, as new figures from Revenue show, inheritance tax is not a big money-spinner for Government. Here are some insights from the latest figures.
Most people won’t pay it
While there have been repeated calls to reinstall the previous high tax-free parent-to-child threshold, which stood at more than €542,000 back in 2009, it’s worth noting that despite rising house prices, the current threshold is in line with national property averages.
According to the CSO, for example, the average national house price is currently about €330,000 – while the threshold is €335,000.
This means that even when there is just one child, a typical family might avoid inheritance tax on the family home. And families have other tools at their disposal to avoid the tax, including availing of the small gifts exemption, which allows someone to receive a gift of €3,000 a year, tax-free.
Indeed, a transfer-of-wealth publication from 2020 by the CSO found an average inheritance of €100,000 and gift of €20,300 – so most people won’t be burdened by capital acquisitions tax (CAT), at a rate of 33 per cent.
It’s not a big contributor to the exchequer
While inheritance taxes might generate a lot of attention, on an annual basis they don’t contribute a significant amount to the exchequer’s coffers.
Combined, inheritance and gift tax accounted for just 0.7 per cent of total tax revenues for 2023, or just 0.6 per cent for inheritance taxes alone. Contrast this with income tax (37 per cent), excise (6.5 per cent) or capital gains tax (2 per cent).
It’s also less than motor tax, which, at €905 million, represents 1 per cent of the tax take.
This is not unique to Ireland. Across the Organisation for Economic Co-operation and Development (OECD), inheritance tax typically only accounts for about 0.5 per cent of total tax takes, which is why some countries have abolished it.
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But tax yields are rising
At the same time, however, there is no doubt that as asset and property values have risen in Ireland, so too has the exchequer’s tax take.
In 2013, plummeting property values in the wake of the financial crisis meant the tax take was low, at just less than €260 million for inheritance tax, and a further €20 million for gift tax. This was despite a low parent-to-child tax-free threshold of just €225,000. Combined then, it meant that 10,152 Irish taxpayers paid tax on inheritances and gifts worth some €850 million that year.
This suggests an average gift/inheritance of about €84,000, and an average tax bill of €27,580.
Fast forward to 2023, and the average house price has jumped to €330,000.
Not surprisingly, payments made to Revenue for inheritances and gifts of assets such as properties have jumped accordingly.
Tax yields have more than doubled, up to almost €560 million for inheritance, and a further €75 million for gift tax, suggesting taxable inheritances and gifts worth some €1.9 billion were subject to such taxes last year.
This suggests an average gift/inheritance of €126,666 – and a tax bill of €42,333.
More people are paying it
More people have over the years been pulled into the tax net. Some 15,000 people paid inheritance/gift tax in 2023, compared with almost 11,000 in 2013 – an increase of some 36 per cent.
Still, when looked at on an annual basis at least, it’s a somewhat exclusive group, representing for many people a once- or twice-in-a-lifetime tax bill. As a comparison, Revenue figures show that some 3.2 million people (or tax units, which could be an individual or couple) paid income tax last year.
And out of a Census population of 5.2 million people, just 0.2 per cent paid inheritance tax last year.
It’s largely a Dublin tax
As the Revenue figures show, most inheritance tax is paid by people living in Dublin. According to the 2022 Census, Dublin accounts for 28 per cent of the overall population, but 53 per cent of those who paid inheritance tax in 2023 lived in Dublin, while the county accounted for almost 60 per cent of the total tax take.
This suggests a clear correlation between higher house prices and higher tax bills. Average house prices in Dublin, for example, stood at €445,000 in the year to January, compared to €330,000 nationally.
When you incorporate the commuter counties (Meath, Kildare and Wicklow), the proportion paid by the Greater Dublin Area increases to 67 per cent.
This is slightly different to 2013, when Dublin only accounted for one in every two euro paid in inheritance tax.
Lower house prices = lower tax
Conversely then, the lower the house prices, the lower the tax take. In Leitrim, the average house price stands at €165,000 – and the county contributes just 1.5 per cent of the total inheritance tax take, with just 259 taxpayers.
Similarly, in Donegal, where the average house price is €178,000, some 214 taxpayers contributed 1.06 per cent of total yields last year, or an average payment of just €27,710 – considerably less than the national average of €42,333.
Of note, however, is the fact that you are least likely to pay inheritance tax if you live in Waterford, where house prices are below the national average, at €265,000, but above levels in other counties. This is because despite having 2.5 per cent of the population, it accounted for just 1.5 per cent of total inheritance tax paid in 2023, and had the lowest number of inheritance tax payers.
Clare, which has a similar population, and a similar average house price (€240,750) to Waterford, had 281 inheritance tax payers last year compared with just 184 in Waterford.
Most tax paid isn’t related to the family home
A lot of the rhetoric in recent weeks on the inheritance tax front relates to the unfairness in paying tax on the family home, a burden that can result in some people being forced to sell to settle the tax bill.
However, this does not arise as often as you might think.
According to figures from Revenue, of the €557 million in inheritance tax collected in 2023, some 60 per cent, or €341 million, related to transfers other than from a parent to a child, so-called category B and C. Not the family home, in other words.
This means that just €216 million was collected from direct family inheritances in 2023.
This has been the trend for quite some time. In 2013, for example, parent-to-child transfers accounted for just 35 per cent of the overall tax take.
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