Dáil Éireann Debate, Thursday - 26 November 2020
67. Deputy Denis Naughten asked the Minister for Finance if he will reform inheritance tax rules whereby a favoured niece or nephew is treated in the same manner as a child in circumstances in which the deceased has no family; and if he will make a statement on the matter. [38840/20]
View answerChildless couples and individuals with no sons or daughters should be able to leave their home to a niece or nephew, without him or her being taxed to the hilt. I am calling for a change to Ireland's inheritance laws whereby they will no longer punish people for not having children by issuing those to whom they leave their homes with huge tax bills.
A fundamental principle of the capital acquisitions tax, CAT, regime is that inheritance or gift tax is levied on the beneficiary and that the level of taxation is determined according to his or her relationship with the disponer. The reason for this approach is that the capital being transferred has not been earned by the beneficiary and the effective taxation of windfall capital is an important tool for addressing income and wealth inequality.
There are a number of generous reliefs and exemptions to CAT available, one of which is the favourite niece or nephew relief. This relief allows a niece or nephew to be treated as a child of the disponer for CAT purposes in certain circumstances. A person may qualify for this relief if he or she receives a gift or inheritance of business assets, including farming assets. This means the person is entitled to the group A tax-free threshold, currently €335,000, when calculating the CAT liability for the gift or inheritance, rather than the group B threshold, which is currently €32,500. The use of this relief is not restricted to circumstances in which the disponer or beneficiary has no family. To qualify for this relief, the niece or nephew must have worked for the disponer for five years immediately before receiving the gift or inheritance and for a minimum number of hours per week. This is a targeted relief. The policy rationale underpinning the relief is to recognise a niece or nephew who has placed his or her labour and expertise at the disposal of the disponer for an ongoing period to the benefit of the business or farm.
If the Deputy's question refers to potentially extending this scheme, it would clearly represent a fundamental departure from the principles underpinning our CAT regime. It would also be a significant departure from the policy rationale of the relief. Such a move would undermine the basis of our CAT regime and could lead to a significant erosion of the revenue base. That is the reason I currently do not have plans to amend the favourite niece or nephew relief scheme.
If a person leaves a home with a market value of €300,000 in a will to a favourite niece or nephew, who might be the person's nearest relative, the recipient will be hit with a capital acquisitions tax bill of almost €88,275, while a son or daughter would get a tax-free inheritance threshold of €335,000. A nephew or niece is only entitled to a threshold of €32,500 before paying tax at a rate of 33%. By contrast, Britain has a tax-free inheritance allowance of £325,000, regardless of who the beneficiary is in the deceased person's will, before taxation comes into effect. The threshold is even higher for children of a deceased person. Will the Minister look again at these thresholds?
We are in the annual process of passing the Finance Bill and Report Stage will be taken in the House next week.
I have indicated that I do not have plans to change the thresholds to which Deputy Naughten refers in the Finance Bill. It is important that I am open about that to the House. I do not believe that such changes are currently merited given the huge pressure that we are under to pay for a level of public service that the country now needs in the context of our battle with Covid-19. The reliefs are always kept under review from budget to budget and when we approach next year's budget I will assess where the reliefs stand. The kind of structural change I believe the Deputy is looking for is not one that is justified, but I thank him for raising this matter.
I will put an alternative suggestion to the Minister. The favourite niece or nephew relief applies where someone has been working the land or working in a business with an uncle or aunt. Will the Minister extend the relief to a favourite niece or nephew residing in the home of the uncle or aunt who is providing care to the uncle or aunt? This happens regularly and these people can end up being hit with a significant financial burden after caring for an uncle or aunt. In the context of Covid-19, as referenced by the Minister, we must try to ensure we provide as many supports as possible for older people in the community. This could be a mechanism to do that and acknowledge, through the taxation system, the care that is being provided to older people in their own homes.
Deputy Naughten raises an important matter in regard to care. The care that people provide to other family members is indispensable to those families and also allows the State to look after those who are vulnerable, in particular those who are elderly and vulnerable.
I have concerns about making changes to a scheme that does provide such a significant amount of additional relief under the favourite niece and nephew scheme for the reasons I have already outlined. However, the Deputy raises an interesting point which I can consider when preparing for next year's finance Bill.
As Deputies Pa Daly and Devlin are not present, we will move to Question No. 70. Questions Nos. 68 and 69 may be answered later.
