As the Deputy will be aware, a fundamental principle of the Capital Acquisitions Tax regime is that inheritance or gift tax is levied on the beneficiary and that the level of taxation is determined according to their relationship with the disponer. The reason for this approach is that the capital being transferred has not been earned by the beneficiary. In this context, the effective taxation of windfall capital is an important tool for addressing income and wealth inequality, thus enabling our tax code create a fairer society.
In my view, there are already very generous rules in relation to inheritance tax on agricultural property. For instance, qualifying farmers can avail of agricultural relief, which reduces liability to CAT by 90%. The relief operates by reducing the market value of ‘agricultural property’ (including farmland, buildings, stock) by 90%, so that inheritance tax is calculated on an amount, known as the ‘agricultural value’, which is substantially less than the market value.
To qualify for agricultural relief, 80% of the beneficiary’s assets, after having received the gift or inheritance, must consist of qualifying agricultural assets. The beneficiary must also be an active farmer, or lease the land to one.
In addition, another valuable CAT relief is the CAT Favourite Nephew or Niece relief. This relief allows a nephew or niece to be treated as a child for CAT purposes, subject to certain conditions. This means that they will be entitled to the Group A tax-free threshold of €335,000, instead of the Group B tax-free threshold of €32,500, which would normally apply to this relationship.
The aim of this relief is to target a nephew or niece who has worked for their aunt or uncle over a 5-year period prior to inheritance for a minimum number of hours per week, putting their labour and expertise at the disposal of the aunt or uncle and making a sustained contribution to the business before inheritance.
When combined with CAT Agricultural Relief, this relief is intended to support the intergenerational transfer of a family farm and is particularly important in circumstances where a farmer may not have a direct descendant (e.g. child) to whom they may bequeath the family farm.
However, extending the Favourite Nephew or Niece relief to allow the nomination of a ‘Favourite Successor’ would clearly represent a fundamental departure from the principles underpinning our current CAT regime, as well as a significant departure from the policy rationale of the Favourite Nephew or Niece relief. Such a move would also lead to an erosion of the revenue base. For example, this could result in a beneficiary who does not have a family relationship with the disponer becoming entitled to the same tax-free threshold as a child of the disponer, currently €335,000, instead of a tax-free threshold of €16,250.
In addition, this would most likely be followed by pressure to extend this to other reliefs, such as CAT business relief, or more broadly for disponers to seek to nominate a ‘Favourite Successor’ for their estate.
On this basis, there are currently no plans to extend the CAT Favourite Niece or Nephew Relief or to amend the operation of CAT Agricultural Relief to allow for the nomination of a Favourite Successor.