CAT should be applied to transfers of businesses and farms.

[Brendan Burgess]

Under the current regime if I inherit a property worth €1,335,000 from my father, it will be taxed as follows:

Inheritance: €1,335,000
Threshold: € 335,000
Subject to CAT: €1,000,000
CAT at 33% : €330,000

However, if I inherit a business worth €1,335,000, there will be no tax.

Taxable value: €1,335,000
Less business relief: 90% €1,200,000
Taxable value after Business Relief: €135,000

As this is lower than the Group A threshold, I pay no tax.

The only condition is that I must retain it for 6 years.
1) I don't have to have worked in the business.
2) I don't need to work in the business after inheriting it.
3) I don't need to be a relative of the business owner making the gift.

 

[Brendan Burgess]

This is clearly inequitable.
I don't think that there are any limits to this.
If I inherit a business worth €100m, I will get €90m Business Relief.
So I will pay €3.3m CAT on the €10m of taxable income.

This should be scrapped while making allowances for deferred payment so that the business or farm does not have to be sold to pay the CAT.

 

[Brendan Burgess]

That would lead to the sale of every family farm and family business at the end of each generation as most of them don't have the cash to pay the tax.

Hi Purple

Easy to accommodate this.

Charge the CAT as normal on farms and other businesses.
But allow payment to be deferred at an interest rate of ECB +2% annually.
If the CAT is paid within 2 years - charge no interest.

A lot of people inherit farms. They work them for the minimum period required to avail of the CAT relief. And then sell them on.

Likewise with businesses. If someone inherits a business and keeps it, then they can defer the CAT. If they sell it, they pay the CAT.

Brendan

 

[Purple]

Hi Purple

Easy to accommodate this.

Charge the CAT as normal on farms and other businesses.
But allow payment to be deferred at an interest rate of ECB +2% annually.
If the CAT is paid within 2 years - charge no interest.

That would see the owner directors stuff any reserves of working capital into the pension funds and businesses would operate with the bare minimum cash reserves. In effect people who were prudent would be punished.

A lot of people inherit farms. They work them for the minimum period required to avail of the CAT relief. And then sell them on.


Likewise with businesses. If someone inherits a business and keeps it, then they can defer the CAT. If they sell it, they pay the CAT.

Brendan

And if the farm or business is kept within the family the CAT is never charged. Is that correct? That could mean a business has a CAT liability of far more than it's worth.

 

[Brendan Burgess]

That would see the owner directors stuff any reserves of working capital into the pension funds and businesses would operate with the bare minimum cash reserves.

But the CAT charge is on the beneficiary and not on the company.

Brendan

 

[Brendan Burgess]

And if the farm or business is kept within the family the CAT is never charged. Is that correct? That could mean a business has a CAT liability of far more than it's worth.

You could probably put a limit of 10 years on it. Or increase the interest rate after 10 years.

The CAT liability attaches to the beneficiary and not to the business.

So if I am left a business worth €1m with a €350k CAT liability, I must pay that €350k eventually. If I run the business into the ground, I still owe the €350k.

Brendan

 

[Purple]

But the CAT charge is on the beneficiary and not on the company.

Brendan

Yes, the owners reduce the value of the company by stuffing their pension or just buying a big house or buying one for their kids that the children live in for more than 4 years before they inherit it or whatever. That way the company is worth less so the beneficiary has less to pay.

 

[Purple]

You could probably put a limit of 10 years on it. Or increase the interest rate after 10 years.

The CAT liability attaches to the beneficiary and not to the business.

So if I am left a business worth €1m with a €350k CAT liability, I must pay that €350k eventually. If I run the business into the ground, I still owe the €350k.

Brendan

So nearly all family farms and most family businesses world have to be sold after 10 years in order to generate the cash to pay the CAT.

 

[Brendan Burgess]

Yes, the owners reduce the value of the company by stuffing their pension or just buying a big house or buying one for their kids that the children live in for more than 4 years before they inherit it or whatever.

Well yes, they should do that anyway.

As it is, they can artificially pump up the value of the company by retaining profits knowing that they can gift it to their children who will pay 3% CAT on it.

So that is not an argument against it.

Brendan

 

[Brendan Burgess]

So nearly all family farms and most family businesses world have to be sold after 10 years in order to generate the cash to pay the CAT.

Well most families have substantial assets other than their businesses. So they can sell these assets to pay the CAT.

And most farmers have substantial other assets.

They will have plenty of time in advance of the gift to plan the payment of the CAT.

Brendan

 

[Purple]

Well yes, they should do that anyway.

As it is, they can artificially pump up the value of the company by retaining profits knowing that they can gift it to their children who will pay 3% CAT on it.

So that is not an argument against it.

Brendan

That's not great news for the employees. The State would be encouraging employers to reduce the ability of their employer to ride out economic shocks.

 

[Purple]

Well most families have substantial assets other than their businesses. So they can sell these assets to pay the CAT.

And most farmers have substantial other assets.

Do they? Do most farmers have substantial assets other than the value of their farm?

 

[Brendan Burgess]

hat's not great news for the employees. The State would be encouraging employers to reduce the ability of their employer to ride out economic shocks.

So you are suggesting that we should tax large gifts at 3% just in case some owners of companies would take the profits out of their companies and make the companies vulnerable?

I disagree. People who receive large gifts should be taxed at the same rate as any other asset. The recipient and the donor should plan ahead to pay this tax. But if that is not possible the payment of the tax can be deferred but subject to an interest charge.

 

[Purple]

So you are suggesting that we should tax large gifts at 3% just in case some owners of companies would take the profits out of their companies and make the companies vulnerable?

I disagree. People who receive large gifts should be taxed at the same rate as any other asset. The recipient and the donor should plan ahead to pay this tax. But if that is not possible the payment of the tax can be deferred but subject to an interest charge.

The current system allows that family members who work on the farms or in the businesses get a very large discount. If that remained the case then yes, go with your plan.

 

[Brendan Burgess]

I have moved this from the thread on CGT as it's probably a bigger issue.

 

[cremeegg]

Inheritance tax is a nonsense. Why should tax be charged on an asset just because a person dies.

Its origins in feudal law probably spring from the fact that the heir was vulnerable at the time of inheritance and needed the Kings support to succeed, so the King took advantage to extract a cut. We should be past this.

Any asset property or business should be taxed appropriately annually. A meaningful property tax each year and no sudden extra tax on he death of the owner. Similarly a business should pay tax appropriately each year and not be subject to a sudden one-off tax on death.

Tying yourself in knots to propose a better way of levying a tax which is inherently ridiculous is a waste of time.

 

[Brendan Burgess]

I think that most people would feel that inherited wealth should be taxed.

Children of wealthy parents already have a huge advantage over children of parents with no assets. So I would have no problem with taxing them on any inheritance.

Would an ongoing wealth tax achieve the same thing? An interesting idea.

Generally speaking, wealth taxes don't seem to raise much money. So even if you agree with them ideologically, they don't serve much purpose.

Brendan

 

[Purple]

Why should tax be charged on an asset just because a person dies.

We'd end up with more and more wealth concentrated in one group. That's why.

Its origins in feudal law probably spring from the fact that the heir was vulnerable at the time of inheritance and needed the Kings support to succeed, so the King took advantage to extract a cut. We should be past this.

Any asset property or business should be taxed appropriately annually. A meaningful property tax each year and no sudden extra tax on he death of the owner. Similarly a business should pay tax appropriately each year and not be subject to a sudden one-off tax on death.

Tying yourself in knots to propose a better way of levying a tax which is inherently ridiculous is a waste of time.

I agree that a wealth tax is a good idea but only if it is levied on pension assets and family homes. If the person doesn't have the income to pay it then it could be rolled over in to an estate/inheritance tax with a reasonable interest rate accruing.

 

[Nermal]

So nearly all family farms and most family businesses world have to be sold after 10 years in order to generate the cash to pay the CAT.

'Nearly all' is a major exaggeration but - so what?

 

[Purple]

'Nearly all' is a major exaggeration but - so what?

Most family owned businesses are run by family members. It is their skill and their labour that makes the business viable. In both cases their greatest asset is their land or premises.

How many family farms could generate the cash to pay CAT? I'd say very few could so I stand by my "nearly all".
If CAT is applied at the full rate then within a few decades most farms will be owned by corporations and there will be far fewer family businesses. Is that what we want?