Inheritance tax reform could unlock €170bn sitting on deposit, expert says

Reforming the inheritance tax system could be a more effective way of getting the €170 billion held on deposit in Ireland back into circulation, a leading inheritance specialist has said.Dave O’Brien, the head of tax at business advisory group Xeinadin Ireland, said a significant part of this wealth is owned by older people who have no incentive to pass it on to the next generation because of the tax implications.The tax-free threshold for children inheriting from their parents is €400,000, after which a capital acquisitions tax (CAT) of 33 per cent applies. The threshold was €542,000 and the tax 20 per cent before the financial crisis.O’Brien said the Government should consider the seven-year gifting rule adopted by the UK which encourages earlier transfers of wealth by allowing the transfer to be tax free if the donor survives for seven years.READ MORE“If there was an incentive to give those monies away during a lifetime without a tax liability then there would be nothing to stop parents giving the money to their children,” he said.“And then you’re giving the money to people who are younger, who are in their 30s and 40s, and they’re either spending the money [incurring VAT] or investing the money,” he said.The current system can incentivise families to hold assets until death, “when policy could instead encourage money and assets to move earlier through the economy”, O’Brien said.While the Government is planning to introduce a new State-sponsored savings and investment scheme as part of Tuesday’s budget with the aim of channelling some of the €170 billion sitting idle on deposit back into the real economy, O’Brien said offering more tax-efficient ways of transferring wealth between generations could work better.[ Coalition leaders discuss last ditch bid to cut student fees by €250 in budgetOpens in new window ]Another mechanism might be to lower the CAT rate from 33 to 20 per cent, where it was before the financial crisis.“If I was the Government I’d be more leaning to that as you’re getting an intake of 20 per cent in tax, you’re not losing the full 33 per cent, and you’re still getting the money to go around,” O’Brien said.The Government is expected to lift the tax-free thresholds for each category of inheritance or gift in the budget, amid criticism they have not kept pace with rising property values.The Category A threshold (€400,000) governs inheritances received by children, while the Category B threshold (€40,000) covers inheritances received by siblings, nieces, nephews and grandchildren.“We have discussed, and are considering, broader adjustments to inheritance tax across different categories but it will be within what’s available,” Minister for Public Expenditure Jack Chambers told the recent Dublin Economics Workshop event in Wexford.