Seanad Éireann díospóireacht -
Thursday, 18 Nov 1999

Vol. 161 No. 3

Adjournment Matters. - Capital Acquisitions Tax.

Mr. Cosgrave

I appreciate that the Minister of State is not directly concerned with this matter but I hope he will pass my comments to the relevant Minister. I wish to raise the application of capital acquisitions tax, otherwise known as inheritance and gift tax, on dwellings and how certain classes of relatives are treated under this tax. The current tax thresholds are totally inadequate given the massive increase in house prices. During this period the thresholds have only been raised by very small amounts while house prices have doubled or trebled.

I accept that in the run up to the budget there are many conflicting and worthy demands. I am sure the Minister of State has received many such demands in the Department of Health and Children. However, I am particularly concerned about how certain classes of relatives are dealt with under this tax. My proposals repeat the suggestions outlined by the Opposition spokesperson on Finance, Deputy Noonan. One proposal is for the exemption of the family home from inheritance tax in circumstances where the beneficiary lives in the family home and it is his or her principal residence on the date prior to the death of the disponer. I am also seeking the reduction of the three class thresholds to two by amalgamating the two class thresholds regarding relatives. This would also encompass an increase in the exemption limit from £192,800 to £400,000 for the new class A, and from £20,000 to £30,000 for the new class B. There is also a proposal for a more benign regime for the transfer of farms and businesses.

It is clear that the exemption thresholds for inheritance tax have not kept pace with house price inflation. Many houses in Dublin which were purchased for less than £90,000 in the late 1980s are now worth £300,000, £400,000 and even £500,000. I will give an example of a middle aged woman who gave up work to look after her aged widowed mother. When her father died seven years ago the family home was worth £98,000. This woman's mother died last August and left her the family home and a small sum of money. When the funeral expenses were paid there was less than £1,000 left. The house is now worth £350,000 and this woman faces an inheritance tax bill of over £60,000. She has no money to pay the tax and, as she is not working, she does not have an income on which to raise a mortgage to pay the bill.

This woman has been an unpaid carer. As the Minister of State knows, these people receive much lip service but little practical help. If she sells her house she will not be able to purchase a cheaper house in the same area and may have to move to a different area, leaving behind friends and relatives she has known for a long time.

There are a number of issues which must be examined. We must look at the issue of siblings who live together, some of whom are on pensions, and live in a house they inherited or bought many years ago for a small sum of money but which is now worth several hundred thousand pounds. The sibling relationship is not dealt with satisfactorily by CAT as the threshold is far too low. There should be exemptions from CAT on inheritance of a family home where the deceased and the beneficiary both lived in the house as their principal residence immediately before the death of the deceased. The relief would apply to inheritance, not a gift. The category of beneficiaries should be extended to include unmarried couples in long or short-term relationships, including second marriages, children, and brothers and sisters living together. This provision would be subject to certain clawbacks and relief.

The need for change in this area speaks for itself, particularly in light of the increase in property values. There have been many hardship cases. Brothers and sisters, or children and parents who lived in a house for a long time, particularly if one has been a carer, should not have to sell the home and move ten or 15 miles away to get a new house. This case stands on its merits and I ask the Minister of State to respond positively or to raise this issue with the Minister for Finance.

Dr. Moffatt

The Minister for Finance is acutely aware of the difficulties many people now face as a result of the payments they must make under capital acquisitions tax when they inherit the home in which they may have lived for many years.

During the course of the debate on the most recent Finance Act, the Minister made it clear that he would undertake a review of the workings of the capital acquisitions tax system, which includes inheritance tax, to see what could be done to alleviate the problems. Of course these problems stem essentially from the very rapid increases in house prices that has taken place in recent years. This trend in house price inflation has been particularly evident in the greater Dublin area, but many other parts of the country have also been affected by it. Happily the indexes of the various agencies that monitor house prices are now showing that the rate of increase in house price inflation is beginning to decelerate. It would appear that an increase in the supply of dwellings may be starting to make an impact on the market.

The review the Minister promised in relation to capital acquisitions tax is in progress at present, but Senators will appreciate that it would be most inappropriate at a point so close to the unveiling of the budget to lay out for this House any action that the Government may decide to take on foot of this review. However, the Minister asked me to assure Senators that he is conscious of the need for the review to be sensitive to many different types of relationships and the need for equity to the greatest degree possible in any resolution of the matter. Senators will be aware that there are a great many different relationship types in our society. This issue was discussed at some length by Seanad Éireann on Committee Stage of the Finance Act earlier this year. At that time the Minister of State, Deputy O'Dea, who was representing the Minister for Finance, gave certain commitments to the House. While more contemporary relationship patterns may get much of the attention when this matter is discussed, there are other more traditional types of relationships that must also be kept in mind.

Senator Cosgrave addressed in particular the treatment of inheritances between brothers and sisters. Siblings living together in the family home is a traditional type of relationship that has been fairly common in Ireland for a great many years. All of us know of many such situations. However, much has already been to done to reform the capital acquisitions tax code in the area of sibling inheritances. Senators should be aware that amendments have been made to the code in order to provide special reliefs for siblings in defined circumstances. Beginning with the Finance Act, 1991, the special circumstances of elderly siblings living together were given statutory recognition. That Act provided for an easing in the tax burden in circumstances where a house is inherited from a co-sibling. In the 1998 budget this relief was extended for the purposes of calculating the liability to capital acquisitions tax. This was done by way of a reduction in the value of the residence by 80% or £150,000, whichever is the lesser. To qualify for the relief a number of conditions must be fulfilled. The recipient must be a brother or sister of the sibling who gave the house – the person giving the property is known as the disponer – the recipient must have reached the age of 55 years, the recipient must have lived in the house with the disponer continuously for a period of five years or more before the date of the inheritance and, finally, the recipient must not be the beneficial owner or part-owner of any other house. The effect of the legislative provisions is to reduce the level of tax that would otherwise be payable when a sibling inherits from a co-sibling. Indeed the Minister considers that in many cases the liability to capital acquisitions tax may be entirely eliminated.

In addition to supplementing elderly sibling relief in the 1998 budget, the Minister also introduced a similar relief in respect of inheritances by other close relatives. For example, this relief is designed to cover inheritances by grandchildren, nieces or nephews who have been resident with the disponer. To qualify for the relief the recipient must come under the definition which is used for the purposes of the class II threshold for capital acquisitions tax. Among the conditions that apply for the granting of this relief are that the disponer and the recipient must have been living together in the house for ten continuous years prior to the inheritance and the recipient cannot be the beneficial owner or part-owner of another house.

The reason for extending the continuous residence requirement from five years in the case of elderly sibling relief to ten years, is because this relief does not contain an age criterion. As with elderly sibling relief, those who qualify for this relief will, for the purposes of computing the inheritance tax liability, have the value of the inherited house reduced by £150,000 or 80 per cent, whichever is the lesser.

As Senators will observe the Government, through legislative initiatives, has already demonstrated considerable understanding of the taxation problems confronted by particular categories of people when they inherit the house in which they have been living for many years. Furthermore, the Revenue Commissioners will consider proposals for the postponement of the payment of the inheritance tax where payment would cause excessive hardship.

Nevertheless, it must be said that overall capital acquisitions tax remains a very important source of revenue for the State. It is a revenue stream that helps to finance the provision of necessary services and benefits by the State, including services for people who may be living in circumstances that are relatively less affluent. The Minister considers it important that a certain balance be maintained within the overall taxation system in terms of the yield from taxes on earnings, taxes on goods and services and taxes on capital. However, as I indicated at the outset and as Senators will be aware from the debate on the Finance Act, the Minister is mindful of the need for a degree of modernisation and alteration of the capital acquisitions tax code. He has asked me to give assurances to the House that he will be endeavouring to find an acceptable yet equitable resolution to the issue. The House, like the rest of us, will have to wait until budget day to see what the Minister delivers.

The Seanad adjourned at 4.05 p.m. until 12.30 p.m. on Tuesday, 23 November 1999.