| CAT Under Microscope |
Back |
| The Minister for Finance is to review CAT (gift and inheritance) prior to the next budget. The Minister has the opportunity to be radical. |
A review of CAT seemed inevitable once the Minister slashed the 40 per cent CGT rate to 20 per cent. This left the rate of inheritance tax, 40 per cent, looking out of line with the CGT rate.
Some of the issues which the Minister will have to consider in his review of CAT are set out below.
l The present structure of the tax is one with high rates (top rate 40 per cent for inheritance tax and 30 per cent for gift tax). On the other hand, there are sweeping relief€s such that business assets and agricultural assets, are almost entirely excluded from the tax. The result is that when the tax does have application to non business and non agricultural assets, it is confiscatory in nature. The issue facing the Minister is whether to continue with this €Jeckyl & Hyde€, punative for some, and irrelevant for others structure or to go for a very low rate of tax with few or no relief€s.
Probate duty provides a model for a low rate, low relief tax. Probate duty was introduced in an effort to obtain some tax revenues from those areas such as agriculture and business, which where largely outside the main stream CAT.
l Discretionary trusts levies make it very expensive in tax terms to have a discretionary trust. Where a couple with young children are drafting a will designed to cover the possibility that they might die while the children are still young, a discretionary trust may be the only practical solution. You cannot have large amounts of assets given to young children. When discretionary trust levies were first introduced, they recognised this by providing that the levies would not apply where children who were among the beneficiaries of a discretionary trust, were aged under 25 years. This was subsequently reduced to 21 years. That reduction was a major mistake. Few parents would be so irresponsible as to leave significant wealth to 21 year olds to do with as they please. Far from reducing the original 25 year age limit, that age limit should have been increased to 30 years.
l Business asset relief is the most important single relief in the CAT code. Even to the tax advisors specialising in the area the legislation is almost unintelligible. In contrast agricultural relief is brief and intelligible. There must be a strong argument if these relief€s are to be continued with for scrapping business asset relief in its present form, and redrafting it from scratch along the model of agricultural relief.
l At present business asset relief is largely confined to trading assets in Ireland. In the global economy many Irish businesses have to have significant overseas presence in order to prosper. At a minimum, the relief should be available for business assets located in the EU or in states with which we have a double tax agreement.
l Most people are aware that there are €tax free thresholds€ for gift and inheritance taxes. Few people are aware of the sheer complexity of the way the thresholds operate. There are three thresholds, depending on the relationship between the person who makes a gift/inheritance and the donee. The threshold in relation to gifts or inheritances from parents is £192,900. The threshold in relation to other relatives is £25,720. The threshold in relation to strangers in blood is £12,860. So far so good. But if you have received £12,860 of gifts from strangers, and then receive a gift or inheritance of £192,900 from your parents, you might imagine that you still have no tax to pay. You will find that you will have to pay tax on £12,860! Indeed, if after taking a gift of £12,860 from a stranger (the amount of the threshold in relation to strangers), you take a gift of the same amount from your parents, you may be surprised to find that although what you took from your parents is only a fraction of your threshold in relation to your parents, you will face a take bill on £12,860! The problem is that the thresholds in relation to strangers and in relation to relatives are cancelled pound for pound by any gift or inheritance from a parent. As an intellectual exercise, the manner in which these thresholds has been constructed is fascinating. As a practical method of levying tax it is nonsense.
l For gift and inheritance tax purposes a husband and wife are treated essentially as a unit. Transfers between them do not attract the taxes. But once they divorce, transfers subsequent to the divorce do attract the taxes. Not all divorces are acrimonious. Transfers between former spouses are sometimes necessary. The intra spouse exemption should be extended to former spouses.
l The tax operates by aggregating gifts and inheritances from a base date, in order to determine where on the ascending scale of rates a particular gift will fall to be taxed. The Finance Act 1999 moved forward the base date from which gifts and inheritance are aggregated from June 1982 to December 1988. The Minister explained that he was not going over to a system similar to the UK (where only gifts and inheritances in the previous ten years are taken into account) because it would lead to tax planning! In order words, people might have regard to the date on which particular gifts or inheritances fall out of account as being more than ten years old, before arranging to take another. With all due respect, this thinking is pure nonsense. Inheritances are not quiet that easy to plan. The overall effect of such minor planning in the field of gift tax would be infinitesimal. The Minister should adopt the logical UK approach, rather than the €out of the blue and without warning€ rebasing approach favoured by his department.
l A really radical approach would be to abolish the tax entirely (as John Major planned to do with UK inheritance tax but didn€t do). The loss of revenue could be compensated for by abolishing the tax free uplift on death for CGT purposes of assets which form part of a persons estate. In order words, a deceased persons heirs would end up paying tax not on receiving an inheritance, but rather pay tax at a CGT rate of 20 per cent only when they dispose of the inherited asset. If this was done, the inheritance taxes could be confined to transfers of cash only, with tax on all other forms of assets being deferred until their ultimate disposal. At present, where children inherit their parents house in (say) Dublin they are under immediate pressure to sell that house in order to pay the inheritance tax on it. Tax may deprive them of the alternative of living in the house. A replacement of inheritance tax with Capital Gains Tax on disposal of the property removes the pressure to dispose of inherited assets to pay tax. |
Jim Muddiman is a partner in KPMG and co-author of €Capital Acquisitions Tax€, published by The Institute of Taxation in Ireland.
|
| Article appeared in the April 1999 issue.
|
|
|
