Vol. 505 No. 4
9 Mr. Noonan asked the Minister for Finance the plans, if any, he has to increase the threshold for exemption from inheritance tax to bring it in line with recent increases in house prices; and if he will make a statement on the matter. [13863/99]
I appreciate the concerns the Deputy has raised and I am aware of the tax burden facing individuals, especially on inheritance of the family home. During the Dáil debate on the Finance Bill I undertook to examine the capital acquisitions tax code in detail prior to the next budget. I want to see if we can come up with a solution that alleviates the tax burden and, at the same time, is fair to all who face similar circumstances in relation to CAT on the domestic residence.
However, it must be remembered that any changes in the CAT area are costly. The yield from inheritance tax was £77.5 million for 1998. This revenue greatly assists the Government's programme and helps achieve the ongoing goal of reducing the tax take on employment incomes. For this reason, any significant changes to the CAT must be considered in a budgetary context when choices have to be made on which elements of the tax system to address.
To accommodate concerns about the inheritances of property, which have increased in value as a result of the recent rise in house prices, the various class thresholds would have to be significantly increased. At present a child can inherit up to £192,900 from his or her parents free of capital acquisitions tax. This exempt amount is described as the class I threshold. Smaller thresholds apply to gifts or inheritances received from other close relatives – class II, £25,720 – and from others not covered by these two thresholds – class III, £12,860. Only the value of benefits received in excess of the relevant threshold gives rise to a charge to capital acquisitions tax. Transfers between spouses do not give rise to CAT. Since 1990 these thresholds have been indexed annually by reference to the consumer price index.
Apart from the significant Exchequer costs involved by greatly increasing the amount of wealth which could be passed free of tax, there is also the question of tax equity to be considered. Significantly increasing the thresholds would benefit only those who receive substantial inheritances.
Is the Minister aware that if full allowance was made for increases in the cost of housing in the years since the present rate of inheritance tax was introduced, family homes valued up to £1 million would be exempt? Does he accept that present thresholds are totally out of line with the kind of regime envisaged by his predecessors when the tax was introduced?
The introduction of capital acquisitions tax in the early 1970s was a significant departure from the estate duties system, which existed until then. The changes to the new system were worthwhile. I accept the value of property has increased substantially above the thresholds then envisaged and the increases in thresholds over the years are not in line with what would have happened if we had indexed property prices to the levels that pertained at the start of the code. As I indicated during the debate on the Finance Bill, prior to the next budget, I intend to undertake a fundamental review of the whole area of capital acquisitions tax to address a number of anomalies in the system.
I thank the Minister for again renewing his undertaking in that regard. However, I ask him to give a commitment that persons covered by the class II threshold, including relatives such as brothers and sisters, will be favourably considered in the review. The Minister will be aware, as we all are from cases in our constituencies, of the difficulties that arise when the family home has to be passed to a brother or sister. Before the colossal increases in house prices, the thresholds were reasonable for the direct line of descent, whether up or down. However, they are very onerous on a lateral beneficiary, such as a brother or sister. I ask the Minster to consider this aspect with a view to abolishing the class II threshold and incorporating it into class I.
I have my own views, developed over a long period of time, on this area. I will consider the Deputy's suggestions. I am aware of problems that have arisen due to the low class II threshold as it applies to transfers between brothers and sisters.
Changes and concessions have been made over the years, by me and my predecessors, to alleviate some of these problems. However, I am strongly of the view it is time to carry out a fundamental review of this whole area. This would include consideration of some of the Deputy's suggestions and I will be glad to accept representations from him, including examples which would strengthen my case, when I undertake a far reaching review before the next Finance Bill.
It would be worthwhile to consider the favourite nephew and niece provision of the code with a view to extending it to persons who act in those capacities but who are not blood relatives. There are anomalies in that category also. Even though we share the Minister's view that inheritance tax has brought a lot of revenue to the Exchequer in recent years, it has been an accidental bonus of rising house prices. The money raised in 1998, to which the Minister referred, was not forecast in the budget of that year. It is part of the general buoyancy in revenue. It is bad practice to consider accidental revenue buoyancy as part of the status quo and the Minister's review should take this into account.
I agree with the Deputy.
