IRELAND HAS A strange relationship with the concept of wealth.

If you asked the average person on the street if they’re in favour of higher taxes for the wealthy, chances are they’d say ‘yes’.

But in Ireland, the vast majority of the country’s wealth is tied up in property. This means that any tax on wealth should, theoretically, be a tax on property.

This is something people tend not to like. There’s an emotional reaction to it, a sense that any tax on the ‘family home’ is an unjust one.

It’s likely why invoking the ‘family home’ is a strategy which opponents of inheritance tax have invoked time and again. And it’s one which appears to have worked. 

Based on informed speculation and government hints, the threshold for Capital Acquisitions Tax, commonly referred to as inheritance tax, will be raised.

Currently, if a child inherits from a parent, they pay no tax on the first €335,000 and then they pay 33% capital acquisition tax on everything above that threshold. 

Suggestions ahead of the budget is that this threshold is set to rise to €400,000. 

The reasoning for this is pretty clear. Going back to the ‘family home’. When Irish people think of inheritance, they tend to think of inheriting a property.

As of July, the median price of a home sold in Ireland was €340,000. This is just above the inheritance tax (IHT) threshold of €335,000.

Irish property prices are almost certain to rise, at least in the short term. Therefore, more and more people will have to pay IHT when inheriting the ‘family home’. 

There is a view that this hits the ‘squeezed middle’ who have worked hard to pass a modest home to their child. This is a view exposed by the current and previous Taoiseach.

This is something which many view as fundamentally wrong. So the threshold will rise to €400,000 to keep up with inflation and ensure as few ‘family homes’ as possible are taxed. 

Very rare

What may be surprising to discover is that this is something which very rarely happens in reality.

Instead, the tiny number of people who pay inheritance tax tend to be the wealthiest in Irish society.

The CSO published a great study in 2022 looking at the issue.

It found that under a fifth of people in the poorest 20% of the population get an inheritance, versus almost two-thirds of the wealthiest 20%. It may be obvious, but bascially it’s wealthy who are more likely toget an inheritance. 

Homeowners were also much more likely to inherit – 44% get some kind of gift over their lifetime, versus just 18% of renters.

So now we narrow the group further – it tends to be relatively wealthy homeowners who inherit.

For those who were fortunate enough to get an inheritance, the typical value was just over €100,000 – far, far below the €335,000 threshold where you’d have to pay any tax. 

Writing in the Irish Times, Economist Barra Roantree estimated that under 3% of households get an inheritance worth over €335,000.

While that number would likely rise with inflation, it will still be a tiny fraction of the overall population.

Furthermore, Roantree and many others have also pointed out that the €335,000 threshold is *per beneficiary*. This means if a parent has two children, a home would need to be worth more than €670,000 before either child paid a cent of IHT.

There are also some exceptions to IHT.

For example, the ‘exemption for a dwelling house’.

This is a measure which means that if a child is living with a parent, and the parent dies and leaves them the family home, the property will be exempt from IHT.

Sometimes opponents of IHT suggest a child inheriting a property could be at risk of being without a place to live due to having to sell the home to pay the charge. 

This exemption means that simply doesn’t happen.

So it is a tiny fraction of people who will ever have to pay IHT. 

Those who do pay it, would most likely be in the wealthiest 20% of people in the country. They would also likely already have their own property. 

Taxing wealth

It’s also worth noting that, by EU standards, Ireland doesn’t tend to tax wealth very much, instead preferring to tax income. 

The Commission on Tax has calculated that capital – that is, assets such as homes – are typically taxed at 14.4% in Ireland. This is compared to a median of 26.5% across the EU.

Again, this comes back to the fact that most Irish wealth is stored in people’s homes.

And any tax that even hints of taxing homes is resisted. For example, when the Local Property Tax was introduced as an austerity measure during the recession, thousands of people took to the streets in protest.

The charge was kept modest for years, tied to 2013 property prices until 2021. Politicians consistently voted to keep the charge as low as possible.

Currently, a typical homeowner pays just over €300 a year in Local Property Tax.

Compare that to an income tax. The same Commission on Tax study noted that labour (ie, income from working) is typically taxed at 32% in Ireland, much higher than wealth.

On Income Tax, Ireland is much closer to the EU median of 36.5% with PRSI also seto to rise to help pay for Ireland’s looming pension deficit. 

The rate paid by both workers and employers will rise by 0.7% by 2028, something that will bring in about €1.7 billion a year from workers to the Exchequer. 

The median annual wage in Ireland is hovering around €45,000 a year. As things stand, workers paying 0.7% more PRSI would fork out an extra €315 a year – coincidentally, about the same as the average Property Tax.

The charge will probably have to rise even further after 2028 because of how bad the pension problem is predicted to become. Despite this, barely anyone cared about the increase – it certainly didn’t get thousands of people out on the streets. 

And try to talk about PRSI increases with a friend or neighbour, you’re likely to be greeted with a barely suppressed yawn, compared to the passionate response and endless discussion provoked by Local Property Tax. 

This is even though homeowners paying Propety Tax are likely better off on average, while the most affected by PRSI hikes will be younger employees with more of their working lives ahead of them.

With the predicted cost of the likes of state pensions in the future, lower taxes on wealth means higher taxes on labour – ie, income. 

Inheritance 

Coming back to IHT – it’s basically the same principle as Local Property Tax, but accentuated.

Even fewer people pay IHT versus Property Tax. Those who do pay IHT are far more likely to be among the wealthiest in society.

And it’s worth noting that those who do pay it, don’t tend to pay it due to inheriting a property.

Of the €557 million in inheritance tax collected in 2023, just €216 million was due to transfers from parents to children. 

Raising the IHT threshold to €400,000 will have more of an effect of lowering taxes paid on other inherited forms of wealth, such as shares in companies. 

It will also cost the state just €52 million a year in foregone revenue, a fraction of the €1.7 billion brought in by increasing PRSI by 0.7% for everyone. 

Despite this, the news coverage it gets is multiples of the column inches PRSI will accrue.  

Connection

But even so, Irish people tend to have a deep emotional connection to their homes.

It’s often the place where children grew up, with parents working hard to keep a roof over their heads. Housing is emotional, PRSI isn’t.

People see the IHT threshold, see that it’s close to typical house values and think: “My child might have to pay that. On the home I’ve shed blood, sweat and tears to pay for.’

Basically all stats show that only a small fraction of (mostly wealthy) people will ever need to pay inheritance tax. But this doesn’t diminish the genuine anxiety that many families feel.

That anxiety is being used to introduce a tax break which will disproportionately benefit the wealthy.

Some may say  – why connect lower wealth taxes to higher income taxes? 

Ireland, as we’re often told, is a rich county. Shouldn’t we be able to lower IHT while also keeping PRSI as it is?

Unfortunately, massive expenses are coming down the tracks for Ireland – the incoming pension timebomb is just one of them. And the Corporate Tax bonanza papering over every crack in the public finances likely won’t last forever.

In the end, the state’s money all comes from the same big pot. Less money from one area means more is needed from somewhere else.

With the IHT threshold almost certain to rise to €400,000, it’s important for people to ask themselves who truly benefits. 

While the change might appear to be a victory for ordinary families, this is unlikely to be the reality. 

Reducing IHT means that wealthier households – who are already more likely to inherit – will pay even less in taxes.

Ireland tends to avoid taxing wealth, favouring higher charges on incomes. Perhaps it’s time for a closer look at how fair that really is.