One of the contentious issues during the general election campaign was inheritance tax. And both of the big Coalition parties made promises to cut the burden further in the years to come and to look at the “fairness” of the system.
The recently published Tax Strategy Group papers – drawn up by civil servants to outline options for budget day – have taken the debate further, scoping out possible reforms. Whatever happens here, there will be big debate. So what are the options?
1. Do nothing: There is limited room for manoeuvre in the €1.5 billion budget tax package, promised in last week’s Summer Economic Statement. So the Coalition parties could decide to do nothing.
While commitments were made in the manifestos of the two big parties, the promises were not repeated in the Programme for Government. That said, the drumbeat of parliamentary questions on the topic- " will the Minister consider...?" - continues, showing that backbench pressure remains. Even though many inheritances escape tax completely, this is still a hot political issues.
RM Block
2. Increase the thresholds: In Ireland, as in most other countries, inheritance tax is paid by the person inheriting the money, rather than coming from the estate of the person who died, as it does in the UK and US.
The amount of inheritance tax you pay depends on your relationship to the person you are inheriting from – known in tax jargon as the disponer.
For spouses and civil partners, inheritances are free of tax. There are then three tax free thresholds over which you pay the 33 per cent tax rate. The tax involved is formally known as capital acquisitions tax – which also covers gifts – and the thresholds are lifetime limits. So if you inherit from someone, large gifts (anything over €3,000 given in a single year) you received are also counted in.
The tax raised €850 million last year for the exchequer, of which €725 million related to inheritances and €125 million to gifts.
In last October’s budget, the group A threshold which applies to children inheriting from a parent (or vice versa) rose to €400,000 from €335,000 previously.
The group B threshold applies to brothers, sisters, nephews, nieces, and grandchildren of the person giving the gift or inheritance. It rose in the last budget from €32,500 to €40,000. The group C threshold, applying to everyone else, rose from €16,250 to €20,000. The total cost was €88 million to the exchequer in a full year.
The nature of the thresholds means that the limit applies for any inheritance you receive from someone in the same group - so, for example, if you receive an inheritance from one brother, then this is counted against your Group B threshold and counts in the calculation if - say - an uncle subsequently left you money.
Special rules apply in some particular cases, such as foster children and inheritances by parents from their children, as well as in other limited cases, such as someone who has lived in a home with the person who has died for a period and plans to continue to do so.
Further increases in the main thresholds would be the cleanest budget measure. The Fianna Fáil manifesto promised to review the thresholds each year while Fine Gael said it would aim for thresholds of €500,000, €75,000 and €50,000 for the three categories – though it did not give a timescale for it. Might a rise in the Group A threshold to €450,000 be on the cards, with B rising to €45,000 in the October budget?
3. Focus on the Group B threshold. In a recent answer in the Dáil, Minister for Finance Paschal Donohoe said the Government would ask that the specific issue of the relatively low level of the B threshold relative to the A one would be examined by the Tax Strategy Group (TSG). Is it significant that out of the many questions received by Donohoe on the subject, this was the one referred to in the TSG papers?
This threshold is seen by some to unfairly disadvantage some family relations – for example those inheriting from aunts and uncles can inherit €40,000 tax free, compared to those inheriting from parents, where the figure is €400,000. People who do not have children feel particularly strongly on the issue and this is a key part of the pre-budget lobbying for change.
The TSG points out that 70 per cent of those who received a substantial inheritance received it from their parents – and that the Irish legal system differentiates in other areas between direct familial relationships and more distant ones.
Because of the level of tax relief which applies to children inheriting from their parents, the amount of inheritance tax raised under the Group B threshold – €339 million last year – was actually higher than the than Group A total, at €298 million. (When gifts are added in, the total revenue from Group A remains slightly higher.)
This means reform of the Group B threshold would not come cheaply. While the officials warned that it was impossible to give a precise estimate, they said that giving those in Group B the same €400,000 threshold as children in Group A would cost a maximum of €300 million a year.
Of course a smaller increase in the Group B threshold would also be an option.
Another possibility is an increase in the €3,000 annual small gift exemption. The cost of this is impossible to estimate, but is probably not too large.
4. Introduce new reliefs: Another option to help heirs beyond direct children would be to allow the person making the gift or inheritance select one or two people who could benefit from the Group A threshold, according to the TSG.
This would also be potentially costly to the exchequer. The TSG papers did not go into detail here and thought would be needed in framing any new rules – to ensure, for instance, that children were not disadvantaged.
5. Reforms with no cost to the exchequer: Government officials tend to put forward options which are unlikely to happen, as well as likely runners. The TSG report points out that if the Government wanted to merge the A and B threshold without any cost to the exchequer, it could create a single threshold at €151,500.
This might please nieces and nephews receiving inheritances, but would leave children much worse off, as a lot more of what they get would be exposed to the 33 per cent charge.
It would, however, be in line with the report of the Commission on Tax and Welfare, which reported in 2022 and called for a significant cut in the Group A threshold. Still, given the sensitivity of the issue, this looks like an unlikely runner.
6. Raising money: Perhaps to annoy their political masters, the civil servants also scoped out ways of raising more money. One was, as in countries such as France, to charge a higher rate on larger inheritances – and a much smaller one on smaller amounts. Removing the tax thresholds entirely and having a sliding scale of rates from 1 per cent on amounts below €40,000, rising gradually to 40 per cent on amounts over €400,000 would raise close to €1 billion extra for the exchequer.
Another was – again as recommended by the Commission on Tax and Welfare- to reduce the relief available to people inheriting farms or businesses which allows for a 90 per cent reduction in liabilities and also tax-free thresholds. This also looks unlikely seeing as the Programme for Government promises to take new measures to boost farm succession and “support farm transfers by reviewing the tax-free threshold for Capital Acquisitions Tax”. The review foregone from the agricultural and business reliefs is around €670 million.
Any reforms in Budget 2026 are likely to give, rather than take. Calls from the Commission on Tax and Welfare that the Irish tax system should be reformed so that more tax is paid on capital will, for now, be ignored.
