The Irish tax that’s caught Labour’s eye: What is it and how is it seen there?

Wednesday, 28 August 2024

This story was originally published in July.

When Labour holds its next party conference at the end of the year, tax policy is likely to be near the top of its agenda.

Finance spokesperson Barbara Edmonds sent a strong signal in March that a comprehensive capital gains tax may be back on its table, questioning the fairness of the current tax system.

But some within the party are also understood to be eyeing the merits of Ireland’s Capital Acquisitions Tax, which is a souped-up version of an inheritance tax.

It seems too soon to say whether Labour might view a similar tax here as an alternative or as a bolt-on to a comprehensive capital gains tax, a tax that organisations including Chartered Accountants Australia and New Zealand are continuing to push.

Most of the 38 developed countries in the Organisation for Economic Cooperation and Development have both an inheritance tax in some form and a capital gains tax.

At the moment, the Labour Party is believed to be at the stage of bouncing around its options.

What is Ireland’s Capital Acquisitions Tax?

A 33% tax that Irish people pay on inheritances and gifts they receive.

The most innovative design feature that distinguishes it from most such taxes is that a “lifetime” tax-free threshold applies.

Irish people can receive up to €335,000 (NZ$558,00) in gifts and inheritances from their parents over their lifetime tax-free.

But if the total climbs above that level, a 33% tax then applies to any further gifts or inheritances over that threshold.

So, translating it into New Zealand dollars, if someone was gifted the equivalent of $100,000 by their parents when they were young and later received an inheritance from them worth $1 million, they would then need to pay the equivalent of $178,860 in tax.

A lower tax-free threshold normally applies for inheritances and gifts received from more distant family members, and people who aren’t family.

Any other fine print?

Yes. The main carve-outs are that in addition to the lifetime tax-free threshold, people can receive gifts of up to €3000 a year from any number of people without paying tax on those, or them whittling-away their lifetime tax-free threshold.

Gifts and inheritances between spouses are ignored and there are some exemptions for houses inherited by other people who are living in them.

With some conditions attached, gifts and inheritances of businesses and farmland are only taxed at 10% the rate of other gifts and inheritances.

That means, for example, that someone could potentially inherit a farm or business worth €3.3m tax-free, and would only need to pay 3.3% tax on any value it had above that.

Why look to Ireland?

Eugen Trombitas used to be a tax partner at PwC in New Zealand until April last year and is now a managing director for PwC based in Dublin.

Ireland is a good country to compare with New Zealand because both countries have a population of about 5 million, he says.

“As a Kiwi living here, I can say that tax policy is very soundly thought through in Ireland.

“The main differences with New Zealand — other than the Capital Acquisitions Tax — are that corporate tax is lower in Ireland, New Zealand does not have a fully-fledged Capital Gains Tax, and New Zealand’s GST is more broad-based with fewer exemptions.”

A single childless person in Ireland pays income tax at the rate of 20% on income up to €42,000 (NZ$73,700) a year, and 40% income tax on any income above that.

What do the Irish think of the CAT?

PwC’s Capital Acquisitions Tax (CAT) expert in Ireland, Beryl Power, says that “like any tax”, it is not particularly popular.

“Some people feel that it is unfair where they have paid, say, income tax on their earnings and now their beneficiaries must pay CAT on any gift or inheritance they receive from them.

“However, as CAT has been around for a number of decades it is now an embedded part of the tax system in Ireland. It was first introduced back in the mid 1970s so it has been around a long time.”

Inheritance and gift taxes are pretty easy to avoid?

Power says there is actually “generally a good level of compliance”.

“When CAT was first introduced and for a long time afterwards, there were provisions in the legislation which made other people responsible for the tax if the beneficiary didn’t pay, such as the donor, and any unpaid CAT was also a charge on property.”

Those provisions have been relaxed over the past 10 years as Ireland’s equivalent of Inland Revenue now feels there is a good level of compliance, she says.

“There is a lot of reporting as part of the probate process when someone passes away which helps to ensure that lifetime gifts are picked up.”

Ireland’s tax department has also invested in improved technology and risk assessment tools to help them detect non-compliance, she says.

How much does the tax raise?

Not much in the scheme of things, but the sum is rising quite quickly.

Ireland’s Department of Finance reports that the amount of money raised by the CAT has more than doubled over the last 10 years to €634m in the 2023 calendar year.

For comparison, Ireland raised €1.7b from its Capital Gains Tax the prior year and just under €33b from income tax last year.

Power says she expects the contribution of the CAT will continue to rise.

“When CAT was introduced the tax-free threshold would have been at a level that a lot of medium-income families would not have been liable for CAT when assets were passed on to the next generation.”

But family wealth has increased significantly since then “so the tax is now applicable to a much broader part of society than it would have been historically”, she says.

How might Labour attempt to sell a CAT here?

As a way to increase the chances of future governments getting on top of the country’s financial and infrastructure deficits without piling more pressure on wage-earners though income tax.

And as a means to take the edge off a looming massive increase in wealth equality.

Wellington consultancy Berl (Business and Economic Research Ltd) forecast in April that over the next 20 years, Kiwis aged over 55 — including the “baby boomer” generation — would transfer $1.1 trillion of wealth as they aged and passed away.

Given that the wealthiest 10% of households own just over half the country’s wealth, Berl noted the transfer of wealth to younger generations will be very uneven.

What it described as the “great wealth transfer” would also come at a time when smaller families were more the norm, meaning heirs would receive a larger share of each donor’s estate, it pointed out.

“As well as the financial impacts, this concentration of wealth might also confer additional inter-generational advantages at the top of the wealth distribution tables, reducing equality of opportunity,” it warned.