In a report published yesterday, the Commission on Taxation and Welfare called for significant changes to the future of the tax system. Here Goodbody Tax Specialist Aodhan Deane examines these proposals and what they mean.
Recommendations contained in a 500+ page report published by the Commission on Taxation and Welfare yesterday have already prompted a mixed reaction.
Of course, debate on
the recommendations is essential – and so far, government ministers have played
down the proposed sweeping tax increases as difficult. Will these tax proposals
be acted on?
We’ve analysed the report in detail – and here we present our views on some of the key recommendations and what they will mean for our clients, if implemented.
Taxes on Capital & Wealth
The Commission report recommends that the take from wealth and capital taxes should “increase materially” as a proportion of overall tax take. This has potentially far-reaching implications for CGT and CAT.
The report says a new tax on net wealth should
not be introduced without first attempting to overhaul Ireland’s existing taxes
on capital and wealth, recommending a substantial rework of CGT and CAT.
Proposed change: CGT levied on transfers of assets on death
The report proposes that the transfer of assets on a death should be treated as a disposal for CGT. It views that where an individual holds an asset until death, all capital gains accrued in life are, from a CGT perspective, “washed out” of the tax system.
What this means: Currently, no CGT arises on death and assets rebase to market value without any charge to tax.
Is this change likely? The topic of charging CGT on a death does not appear to have been the subject of much discussion in previous reviews of the tax system. However, it is worth noting that many of the recommendations in a previous Commission on Taxation Report (from 2009) were subsequently implemented, but, it is clear the government at that time were under significant pressure to raise tax revenues.
Currently, the UK does not charge CGT on death, which may influence the government to retain the status quo.
Proposed change: Principal Private Residence Relief curtailed
Property is the most significant form of wealth held by Irish households, and so, the Commission views the complete exclusion of the Principal Private Residence (PPR) from CGT to be an anomaly in the tax system. It has therefore considered different mechanisms by which PPR Relief could be curtailed.
According to the
Commission, the priority should be to increase the yield from the Local
Property Tax in the short term so that it forms a substantially larger share of
total revenues, and PPR Relief should be restricted over time.
What this means: Full CGT exemption on the disposal of a PPR would no longer apply where a property has been occupied as a PPR throughout the entire period of ownership.
Is this change likely? Restricting the level of PPR relief does not appear to have received much airtime in previous reviews of the tax system and in our view, restricting the relief could prove controversial for any government.
Proposed change: Retirement Relief
Currently, there is no limit on Retirement Relief on the transfer of a qualifying business or farm to a child where the parent is between the age of 55 and 65. A €3m limit applies to cap Retirement Relief on the transfer of a qualifying business or farm to a child where the parent is age 66 or over.
The Commission recommends
the introduction of a lifetime limit on all disposals of businesses and farms
to children that qualify for Retirement Relief, not just from 66 years.
What this means: A restriction on the relief where it applies to children, this measure is probably in response to the view that very significant qualifying assets are escaping a charge to CGT where this relief applies. However, the conditions that need to be satisfied in order to obtain this relief are numerous and can be onerous – not every farm or business qualifies.
Is this change likely? Restricting the level of Retirement Relief was discussed in the previous Commission on Taxation Report (2009) and some of the recommended restrictions in the 2009 Commission report were subsequently implemented. Our view is that a restriction on the unlimited level of Retirement Relief available on transfers to children will be implemented.
Gift & Inheritance tax (CAT)
Proposed change: A substantial reduction in the tax-free threshold that parents can provide to their children. The Commission recommends lowering it over time to be closer to the amounts that can be received from other relatives (€32,500) and more distant relatives or friends (€16,250).
What this means: Currently, under CAT rules a child can receive a gift or an inheritance of €335,000 from their parents tax-free. Above that, they must pay CAT at 33%.
The government has
previously defended the size of the parent-to-child tax free threshold on the
basis that the family home is the main element of an estate, and a lower
threshold could force children who inherit a home from a parent to sell the
home to meet the tax liability.
Is this change likely? While the current parent-to-child tax free threshold of €335,000 is lower than the tax-free amount of €542,544 that applied in 2009, the more recent trend has been to increase the tax-free threshold. In 2019, it was raised to €335,000 from €320,000.
We believe the current
parent-to-child tax-free threshold is unlikely to be reduced, at least for the
duration of the current government. In fact, given rising inflation,
consideration could be given to re-introducing indexation of the tax-free group
thresholds which last applied up to 6 December 2011.
Business and Agricultural Relief
Proposed change: The level of Business and Agricultural Relief available for CAT should be curtailed and the qualifying conditions for both reliefs should be refined to ensure active participation in the farm or business.
The Commission believes
the current level of relief provided by way of Business and Agricultural Relief
is excessive – with these reliefs allowing for substantial assets to be
transferred by way of a gift or inheritance while attracting a minimal tax
charge.
What this means: Currently, where these reliefs apply, the value of a qualifying farm or business assets is reduced by 90% when calculating the tax on a gift or inheritance. These reliefs can greatly reduce the CAT payable on these assets.
Interestingly, the recently
released annual Tax Strategy Group
(TSG) papers
also include a discussion regarding a curtailment in both of these reliefs,
outlining how the primary beneficiaries of Business Relief in particular are
not those that are inheriting small farms or businesses, but those inheriting
far more substantial ones.
Is this change likely? Restricting the level of these reliefs was also discussed in the previous Commission on Taxation Report (2009) and some of the recommended restrictions in the 2009 report were subsequently implemented. Additionally, given the topic has been discussed by many sources recently, we think a reduction in the level of the reliefs may feature in the upcoming or future budgets. The reduction may come in the form of a progressive curtailment of the level of relief available beyond certain market values.
Small Gift Exemption
Proposed change: A modest change if a parent gifts a child more than €3,000 in a year. The Commission argues that this will help tackle tax avoidance and ensure Revenue has a better record of wealth transfers.
What this means: Currently, it is possible to receive a gift of up to €3,000 from any person in a calendar year without having to pay CAT, known as the Small Gift Exemption. A child with two parents can therefore receive €3,000 from each parent per year tax-free. Amounts over €3,000 are deducted from the child’s tax-free threshold of €335,000.
Separately, the recent TSG papers outlined that
consideration should be given to lowering or removing the percentage point of
the relevant threshold at which CAT returns must be filed. Currently, there is
an obligation to file a tax return where 80% of the tax-free threshold has been
exceeded.
The Commission recommends
that this reporting threshold amount should be effectively reduced to gifts in
excess of €3,000. The TSG papers outlined how the reporting threshold amounts
could be lowered or fully removed.
Is this change likely? There is a theme emerging in relation to a reporting threshold and so, a change in the rules may be on the horizon. Interestingly, Revenue’s submission to the Commission contained a section on CAT modernisation; this may provide a natural mechanism for the improved recording of wealth transfers.
What about pensions?
There are some radical recommendations on pensions, most notably:
- Tax-free lump sum: A meaningful reduction in the overall level of the tax-free lump sum from its current level of €200,000. Marginal tax rates should apply on all lump sums over the tax-free threshold. It also recommends that there should be a single tax-free lump sum lifetime limit to include both pension lump sums and any ex-gratia termination payments received.
- What this means: At present, pension lump sums from €200,000 to €500,000 are subject to tax at 20%. A reduction in the tax-free lump sum limit and taxation at marginal rates will lead to increased taxation on pension lump sums. Currently, there is also an ability to receive €200,000 tax-free by way of an ex-gratia termination payment and under the Commission’s proposals, this would be done away with.
- Approved Retirement Funds (ARFs): Assets should be treated for inheritance tax purposes in the same way as other assets where inherited by anyone other than the individual’s spouse. Both Income Tax and CAT should apply on an inheritance of an ARF.
- What this means: Increased taxation on ARFs. The current exemption from Income Tax where a child under 21 inherits an ARF would no longer apply and for children aged 21 or over, both Income Tax and Inheritance Tax would apply.
- Tax Relief on pension contributions: The current age-related contribution rates should be replaced with a single annual contribution rate. The Commission also recommends the abolition of the annual earnings cap of €115,000 on contributions and that the maximum lifetime pension fund limit of €2m (the Standard Fund Threshold - SFT) be benchmarked to an appropriate and fair level of estimated retirement income.
- What this means: A change in the level of tax relief available on personal pension contributions, from a varying level of tax relief depending on a person’s age and income to a single annual contribution rate. A change in the maximum tax relieved pension fund.
- Are these changes likely? A reduction in the tax-free lump sum would not be a welcome change but the current limit was a recommendation of the previous Commission on Taxation (2009) so there is a strong possibility that these changes will be implemented in time. While it is acknowledged that the current rules in relation to maximum tax-free lump sum payments and the rules relating to ARFs can create confusion, any increase in taxation may act as a disincentive to saving for retirement. The recommendation that the SFT be benchmarked against an appropriate and fair level of retirement income having regard to prevailing market earnings would likely require time to implement.
