End inheritance tax exemptions

B

basilbrush

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I know this topic has been discussed here many times before and tends to lead to the conversation getting a bit heated, but I think it's too important of an issue to shy away from continuing to talk about it.

I understand the reasoning behind the exemptions to inheritance tax. There are societal and economic benefits from businesses and farms being handed down to children. It is unpleasant to force someone from the house they have lived in all of their life because they can't pay the inheritance tax on it. However, I feel the negative consequences of these exemptions are not given enough attention.

One obvious issue is the unfairness of the system. It seems inequitable that someone can inherit a substantial estate with little or no tax liability simply because they meet the exemption criteria, while others who inherit smaller amounts face significant tax burdens. Furthermore, the qualification for the relief can depend on an interpretation of the rules that results in artificial distinctions between businesses producing substantial differences in tax liabilities. If your parent owns furnished caravans that they rent out, you either get all or none of the business relief when you inherit it depending on the level of service provided to the renters.

Perhaps less obvious are the societal and economic harms caused by people's actions being constrained by the need to comply with the exemption criteria. I know of several cases where children aren't interested in farming or the family business, and their parents would be fine with them doing something else, but they feel forced into it because the inheritance tax savings are, in some cases, worth hundreds of thousands of euros. I also personally know people who are living in their parents' house, even though they would prefer to be elsewhere and being stuck there limits their job opportunities, purely in order to qualify for the inheritance tax exemption. I believe the high price of farmland and low turnover of ownership, which makes it hard for new farmers to enter, is in part directly caused by the agricultural relief exemption.

If your parents own a farm, business, or property that you wish to inherit, what’s wrong with planning ahead for the inheritance tax? Saving in anticipation of this tax and getting a loan to cover any shortfall seems like a reasonable approach.

These exemptions are worth a substantial amount to the people who qualify for them, so any attempt to remove or even reduce them will always be met with very vocal opposition from those people. We saw an example of this when the €10m/€3m cap on business relief was proposed. I think those of us who see the problems of these exemptions need to start being more vocal about our opposition to them.
 
It’s generally true that tax rules affect people’s behaviour or choices.

Often, that’s the point of them. We want people to save for their retirement; hence, tax deductions and deferrals for pension contributions and pension funds. We want people to stop smoking; hence, swingeing rates of excise on tobacco.

But, even where that’s not the goal, tax rules will affect behaviour. The OP points to people living in a house they wouldn’t otherwise live in, or pursuing a career they wouldn’t otherwise pursue — things we don’t particularly want them to do — in order to obtain CAT relief.

In fact, he talks about them “feeling forced” into this. They’re not forced, of course; they are free to move to another house or follow a different career and give up the CAT relief. Their judgment, clearly, is that taking advantage of the CAT relief confers more value or benefit on them, or improves their life to a greater degree, than would changing their home or their career. It follows that, if we abolished the reliefs, they’d be (in their own judgment) worse off. We couldn’t claim to be doing it for their benefit — unless we are prepared to take a “They don’t know what’s good for them!” line.

Even if we did take that line, we can’t abolish the reliefs only for those people who we think would be better off — the ones who would rather live elsewhere or do another job, but haven’t the courage to take the CAT hit involved. We’d also be abolishing the relief for those who really want to stay in the family home, and/or want nothing more than to farm the family land or run the family business. They’d clearly be made much worse off if the relief were abolished — they’d be poorer and they’d be forced out of the home/the career that they love.

You could still come up with other arguments to justify abolishing the relief — the detriment to those adversely affected is outweighed by the wider societal benefits (the extra tax revenue, a policy that generally discourages inherited wealth and encourages homes/farms to be placed on the market, to go those who can exploit them to best advantage). But those arguments tend to look pretty left-wing (inheritance bad!) or pretty neoliberal (the market knows best!) and I suspect won’t have huge popular appeal. Plus they tend to overlook any societal detriment that comes from effectively forcing the breakup of family farms and family businesses or the sale of family homes every generation or so — what does this do to communities?

So I reckon CAT reliefs of this kind are here to stay.

As for abolishing CAT altogether? Wildly unlikely, in my opinion. In Ireland we think of ourselves as a highly-taxed country when, in fact, by comparison with other OECD countries we’re about mid-range. But we do have unusually high income taxes, particularly for people in the middle income brackets. This is balanced by unusually low taxes on capital. If any rebalancing of the tax burden is required, it’s not still lower taxes on capital. The only way I’d see CAT being reduced is in the context of an increase in other capital taxes, such as rates, annual property tax, etc.
 
Can't they just rent it out to a farmer to meet this requirement?
 
Thank you, but for the purpose of this discussion I would like to make the assumption that inheritance tax remains in place and only discuss the specific topic of exemptions.

Thank you also, @TomEdison, for your thoughtful contribution.
I think this is the centre of your argument. As you note, some would benefit and some would be disadvantaged by a removal of the exemptions. You indicate, however, that the financial loss to those who currently receive the exemptions, and the harm to communities due to reduced stability, might outweigh the total benefits. Although it is difficult to predict all of the outcomes of a change of policy, I think this is far from clear. I am even more doubtful of your assertion that there is no popular support for removing the exemptions. Outside of those who receive the exemptions, I expect that there is widespread opposition to the idea of perpetuating family wealth by reducing or eliminating inheritance tax for those who are already likely to be among the wealthiest.

Fortune said:
Can't they just rent it out to a farmer to meet this requirement?
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Only if the conditions are met, including that at least 80% of their wealth after the inheritance is agricultural. The reason for that condition is unclear to me. If they are not interested in farming the land themselves, wouldn't it be better for the land to be bought by someone else who does want to farm it? It seems specifically designed to benefit only the very largest landowners, where the inherited farm is worth so much that any other assets the children may have or inherit, including savings, cars, or a house, are negligible compared to the land that they do not even plan to farm themselves.
 
I believe these farm and small-business CAT exemptions really are a curse.

Family members are often the best people to keep a farm/small business ticking over, but they're highly unlikely to grow it substantially.

Meanwhile someone else bought Apple shares 30 years ago and funded some of the most amazing products of all time will see their shareholding taxed if they leave it to their children.

From an economic perspective we should encourage entrepreneurial activity and high-risk, high-reward investment. That's what leads to long-run growth and prosperity. Imagine Ireland still had half the population working on farms like in the 1920s.....it would be poverty.
 
The core problem is that capital, in the form of homes and businesses, retains more wealth than is should and labour, in the form of work, retains less work than it should. A big part of the reason for that is that labour is taxed quite heavily and the retention of wealth in the form of property is not.

What wealth someone will or will not inherit shouldn't be the prime driver in their future financial planning. But in far too many cases it is.

Anyone who works in a farm for more than 5 years should get an exemption if they inherit that farm. The longer they've worked there the bigger the exemption. The same goes for a family business. There should be no exemption for family members who haven't been involved in the running of the business.
 
Purple said:
Anyone who works in a farm for more than 5 years should get an exemption if they inherit that farm.
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Vanishingly few people will ever fit that bill. Practically everyone who succeeds to a farm has previously worked off-farm and may well continue that even after they commence farming in their own right. Few farms economically are capable of supporting two farmers with a living wage. The days of young and not so young lads patiently enduring poverty while waiting to inherit a prized farm are long gone.
 
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Cousins were exactly this profile, medium size farms, one working in a Bank as a manager another self employed but every spare minute weekend etc holidays working alongside their Dad/uncle but not full time
 
Similarity… 2 cousins worked elsewhere and on the farm after leaving school.
When their dad eventually retired one packed in his job and farmed full time, the other trained as a teacher and now works part time on the farm. I’ve no idea how they split the work and the income but they both seem content.
Both of their spouses have full time well paid jobs.
Between them they have 6 kids… they also have 4 siblings. Lots of potential for family falling out. They managed to avoid that more or less but 6 generous sites for houses and gardens were carved out. The 2 farmer are working to replace that. Not sure how the next generation will deal with it.

A tax bill might have resulted in selling a few more acres to clear it but probably could have been done.
 
Knuttell said:
Cousins were exactly this profile, medium size farms, one working in a Bank as a manager another self employed but every spare minute weekend etc holidays working alongside their Dad/uncle but not full time
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Okay, so they were involved in the running of the business.
 
Purple said:
Okay, so they were involved in the running of the business.
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How do you know?
A farm labourer may no more be involved in the running of the business than a Fastway van driver is involved in the running of that business, ie not at all.
 
T McGibney said:
How do you know?
A farm labourer may no more be involved in the running of the business than a Fastway van driver is involved in the running of that business, ie not at all.
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Establish a criteria for qualification, just like is done in many other aspects of taxation and welfare.
(BTW, Fastway is a franchise, the drivers are self employer).
 
Purple said:
Establish a criteria for qualification, just like is done in many other aspects of taxation and welfare.
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The tax code already incorporates many examples of such. The point is that these tend to poorly fit a common family farm scenario where a lot of family members' work is done unpaid and undocumented.
Purple said:
(BTW, Fastway is a franchise, the drivers are self employer).
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If anything that reinforces my point..
 
T McGibney said:
The tax code already incorporates many examples of such. The point is that these tend to poorly fit a common family farm scenario where a lot of family members' work is done unpaid and undocumented.
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It's not simple but that's not a reason to have tax free transfers of intergenerational wealth.
 
Purple said:
It's not simple but that's not a reason to have tax free transfers of intergenerational wealth.
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That's a wider topic altogether but if your argument is that intergenerational family farm transfers should be taxed, the onus is on you to explain how this can be done without wrecking altogether the phenomenon of the family farm.

Likewise, family businesses.
 
I disagree. We should establish the principles upon which our tax code is based and structure the details accordingly. In my opinion tax free intergenerational wealth transfers are undesirable, especially while earned income is being taxed at a marginal rate of over 50%. The details can be left to the bean-counters.
 
"Here's my preferred policy. I strongly believe in it but haven't the first clue how it can be implemented without causing egregious harm."
 
T McGibney said:
"Here's my preferred policy. I strongly believe in it but haven't the first clue how it can be implemented without causing egregious harm."
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Now aren't you the one that doesn't like other people doing that thing of paraphrasing or assigning quotes erroneously to you Tommy?

The high level principles can be established and the bean counters and minions can be sent away to work out the details. If what they propose isn't acceptable they can be sent off for a second go and so on and so forth.
 
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