Income, capital gains and inheritances should be taxed at the same rates

[Brendan Burgess]

Interesting idea to cap the dwelling house exemption. Intuitively €750k seems a bit on the high side to me - would €400k not suffice?

O.K., we are getting somewhere.

My article said:

Maybe make an exemption for the family home — but limit that exemption to €200,000.

To me the principle is clear. There should not be a unlimited means of transferring wealth though buying a home for someone which they have to live in for only 3 years.

 

[Brendan Burgess]

It's worth bearing in mind that any trading business and its employees/owners will, hopefully, continue to generate tax revenue into the future.

I am not sure of the relevance of this. I am not saying that a business must be closed down on the death of its owner.

I am simply saying that the the person who inherits it, should pay 33% (or more) of the value of the business in Capital Acquisitions Tax. If it's a profitable business, it will generate the profits to repay such a loan. If it's a loss-making business, then it won't be very valuable and won't generate a big CAT bill.

And, I would have no objections to putting in safeguards to avoid a heavy cash flow hit on the business. For example, the payment could be deferred. Interest would accumulate on the bill. Again, it's the principle. It's not right that I can receive a business worth €10m and pay around 3% tax on it.

Brendan

 

[Sarenco]

O.K., we are getting somewhere.

My article said:


To me the principle is clear. There should not be a unlimited means of transferring wealth though buying a home for someone which they have to live in for only 3 years.

Ah, I hadn't appreciated that you were proposing a cap on the dwelling house exemption.

Yes, I agree with the principle of what you are proposing but a cap of €200k seems a bit on the low side in a Dublin context.

 

[Sarenco]

I am not sure of the relevance of this. I am not saying that a business must be closed down on the death of its owner.

I am simply saying that the the person who inherits it, should pay 33% (or more) of the value of the business in Capital Acquisitions Tax. If it's a profitable business, it will generate the profits to repay such a loan. If it's a loss-making business, then it won't be very valuable and won't generate a big CAT bill.

And, I would have no objections to putting in safeguards to avoid a heavy cash flow hit on the business. For example, the payment could be deferred. Interest would accumulate on the bill. Again, it's the principle. It's not right that I can receive a business worth €10m and pay around 3% tax on it.

Brendan

I guess the only point I was making was that if somebody inherits a valuable trading business then you would anticipate that they would pay significant amounts of income tax, etc. into the future so it's not all bad news for the exchequer.

Adding a deferred CAT liability to an annual income tax bill would presumably dis-incentivise the new owner from developing or even continuing the business, which ultimately would result in a greater net loss to the Revenue.

Obviously the new owner could simply sell or liquidate the business but do we really want to force the sale or liquidation of family businesses simply to meet tax bills?

 

[Brendan Burgess]

It's not a simple, cost-free, solution.

But it's wrong that someone can inherit a €10m business and pay 3% CAT on it.

If they own a €10m business, they are probably taking €1m a year out of it in profits. €500k after tax. They could easily afford to repay a mortgage of €3m over time. They would still be getting an asset worth €10m for €3m.

If I understand it correctly, I can inherit my father's business with an effective CAT rate of 3%. I could immediately sell the business for €10m. So my father would be giving me €10m for €300k tax. Is there even a minimum holding period?

Brendan

 

[T McGibney]

A business generating €1m a year in consistent profits will generally be worth an awful lot more than €10m Brendan, when everything is included.

In any event, no bank would advance a long-term €3m mortgage to an established company except in rare cases where it can be secured by a prime blue-chip property or otherwise very valuable collateral. (Very few companies own premises worth €5m or more).

They certainly won't do so in a situation where the managing director and major shareholder in the company has just dropped dead or suffered a life-changing bereavement.

 

[Brendan Burgess]

Hi Tommy

Then rather than take out a mortgage, the Revenue should have a deferred payment scheme with interest at 4%.

The principle is that the recipient should pay a material amount of tax. The detail can be sorted out.

Brendan

 

[T McGibney]

Sorry Brendan, you keep putting forward suggestions for very sweeping and imho unworkable changes to the tax code while saying "The detail can be sorted out."

If you're unwilling to illustrate how you propose to sort out the detail, you're wasting everyone's time

 

[Brendan Burgess]

Hi Tommy

I don't think raising such an important issue is wasting everyone's time. It's a very important issue and needs to be discussed.

I have not drafted legislation on the issue. If I were to do so, there would be more detail.

Brendan

 

[T McGibney]

There's no possibility of worthwhile discussion unless workable suggestions can be framed. It's as meaningless as if I were to suggest that all income tax should be abolished or that the government should nationalise Google Ireland or print money to pay off the deficit.

I'm not asking for legislation, but before anyone can draft legislation, there has to be at least an outline plan of what is to be achieved and how it is to be achieved.

 

[Vanilla]

As long as we're throwing out suggestions ( please no one ask me how to make it workable), you could frame CAT a bit like the fair deals, for businesses, farms, unoccupied houses, and have a notional income from them which then would be capped at a certain level say for a number of years after death and that cap paid over as CAT. That would make it fairer for houses for eg, because putting a threshold of say 200k or 400k will mean very different things for a house in Dublin versus a house in a rural area, but assessing a notional rental income should make it fairer?

I know it would be difficult in relation to businesses/farms because of how accounts can be structured though.

 

[44brendan]

If they own a €10m business, they are probably taking €1m a year out of it in profits. €500k after tax. They could easily afford to repay a mortgage of €3m over time. They would still be getting an asset worth €10m for €3m.

Lets use this example for a dairy farmer with 500 acres milking 500 cows. based on current milk prices this farm would produce an annual profit of c€200K. The value of land alone would be worth c5mln. Farmer dies and leaves the farm to his son. Brendan would like to input a CAT of 30% on this transfer. I.e a tax bill of 1.5mln. farm is probably already carrying a level of borrowings to meet the significant infrastructure costs of running this operation (updated milking machinery, housing etc). So the son will be forced to sell 30% of the farmland to pay the CAT bill, thus reducing the earnings capacity of the farm by a similar amount and in all probability significantly effecting the capacity of the business to service existing & future borrowings.

One example only of how such a tax would cripple family businesses!!! What I disliked about David McWilliams was his simplistic approach to issues such as earnings distribution and tax reform. I can't understand why those of us who are not in possession of the full information insist on putting forward simple solutions to complex issues. Rant over

 

[Sarenco]

It is crazy that the marginal rate of tax for the nurse is the same as for the consultant.

I wouldn't agree with that but I do think that the level of income that attracts income tax at the higher rate is too low. Hopefully we will see the threshold increased in future budgets.

It is also crazy that, for the purposes of inheritance tax exemption, there is no upper limit on the value of the house in which the son or daughter is living.

Agreed in principle but I do think people can reasonably disagree on the amount of that upper limit.

Take the example of a disabled adult child who is not employable and has lived his whole life in his parent's house in, say, Dalkey. Would it be appropriate to require that child to sell his dwelling house on inheriting same and to move elsewhere simply because he happens to live in what has become a very valuable property?

While I don't entirely agree with Brendan on this issue, I don't think it's fair to characterise his article as containing cheap shots. It's certainly prompted a robust debate on here, which has to be good in my opinion. We need more debate on financial issues - not less.

 

[Sophrosyne]

I would like to see some actual figures to support your view.

Here are some to start you off:-

Cost of Tax Expenditures

2014

Agricultural Relief
Number of claims, 1,581
Cost of relief €m 164.4

Business Relief
Number of claims, 495
Cost of relief €m 139.7

I cannot find statistics on CGT or on the private dwelling house exemption, but I suggest that you would have to know what CAT and CGT exemptions and reliefs actually cost the exchequer in order to have some idea of tax savings, which could be deployed against income tax.

The agricultural and business reliefs and also the private dwelling house relief were introduced for good reasons, some have already been mentioned. Perhaps some are no longer valid, but perhaps some still are.

 

[Sarenco]

My understanding of the position in the US is that the CGT exemption on gains arising on the disposal of a PPR is capped at $250k (or $500k for a jointly filing married couple) in any given tax year.

Looks like a reasonable approach to me.

 

[Brendan Burgess]

Lets use this example for a dairy farmer with 500 acres milking 500 cows.

Hi brendan

Farming is a very difficult one because of the economics of farming. Basically no one would buy a farm for €5m to earn profits of €200k.

I would make an exception. Charge 30% CAT on the gift but leave it as a charge on the land. If the farmer continues farming, he will never pay it. If he sells it a year after getting the gift, he pays the tax out of the proceeds.If he sells a few acres for housing, he pays the CAT out of the proceeds.

Brendan

 

[Brendan Burgess]

I agree that there is a good argument in favour of inheritance tax but it must be constructed less emotively.

The original article was not emotive.

It simply pointed out that income is taxed at 51% and there is nothing the worker can do about it, while CAT is a lot lower, and can usually be avoided. Yes, it used an example of a lower paid earner with a higher paid earner giving his children tax-free gifts. Well do you know what? Nurses are paying 51% tax on their overtime and wealthy consultants are buying homes and gifting them to their children. It might be emotive, but it's actually happening.

I could have said "If I work overtime, I pay tax at 51% whereas I can plan the receipt of gifts and pay no tax". I would expect that would still get an emotional reaction, although I presume that would not be regarded as emotive.

 

[Brendan Burgess]

Take the example of a disabled adult child who is not employable and has lived his whole life in his parent's house in, say, Dalkey. Would it be appropriate to require that child to sell his dwelling house on inheriting same and to move elsewhere simply because he happens to live in what has become a very valuable property?

There is a good chance that a disabled person who inherits a large house which he has inhabited with his parents, will probably move to a more suitable house anyway. So I don't really see a big problem with this.

If people want to make some exception for these cases, fair enough. Personally I wouldn't, but as these would be rare enough, I would have no problem.

 

[Sarenco]

There is a good chance that a disabled person who inherits a large house which he has inhabited with his parents, will probably move to a more suitable house anyway. So I don't really see a big problem with this.

If people want to make some exception for these cases, fair enough. Personally I wouldn't, but as these would be rare enough, I would have no problem.

I would have thought that there would be an equally good chance that the dwelling house of the disabled person would already have been adapted to meet his or her requirements. Also, a child that is living in a particular dwelling house for three years before inheriting same (whether disabled or not) is likely to have strong social ties within the immediate vicinity and a forced move to fund a tax liability would presumably cause considerable stress and upset.

I'm not really trying to dream up exceptions - I just don't think there is a compelling case for severely restricting the dwelling house exemption.

I agree that a cap on the dwelling house exemption at some level would be appropriate (to cover a situation where an adult child is living in one of a family's many mansions!) but I really don't think it would be equitable or appropriate to introduce a cap as low as €200k.

 

[cremeegg]

Any discussion of tax reform must first decide wether it is addressing itself to general principles or to the detail of the existing tax code.

When you get into discussing the tax treatment of disabled persons inheriting mansions in Dalkey you know you have gone too far down the detail route.

As a general question what should be taxed, in my opinion only 2 things should be taxed, Earned Income from labour and Wealth.

Transfer of wealth, is not income from labour. To illustrate say Mr A owns a business and pays tax on his salary from the business every year and the business is worth €10m. If he then sells the business for €10m to Ms B and she draws a salary and pays tax on that each year, why should the govt tax the transfer. Mr A gained nothing from the sale. Before the sale he had a business worth €10m after he had cash worth €10m.

Income from wealth should not be taxed, after all it is in societies interest that wealth is put to work.

Now before I am accused of being a mad capitalist, I think that wealth itself should be taxed. If you have €100k in the bank (or shares, or property or land etc.) you should have to pay tax on that €100k every year irrespective of how much interest you earn on the money. The rate of tax on wealth should be the risk free rate of return multiplied by the rate of tax on Earned Income.

To relate this back to the nurse and the consultant. The nurse no change, the consultant would pay tax each year on the capital value of the shares which he sold. The son no tax, but that surely is fair between the consultant and the son they are no better off than they before.