Worry amongst young people with risk of losing tax-free inheritance

Despite the ongoing housing and cost of living crises, it seems as though things might be about to get even more financially difficult for families. 

The Commission of Taxation and Welfare has recommended that a “substantial” reduction should be introduced for the amount of money that parents can leave to their children tax-free. The commission has suggested that the tax-free threshold for inheritance tax should be reduced over the next few years.

This is particularly significant for young people, as it is becoming increasingly common for parents to give their children soft loans for a deposit towards their own house. 

In November of last year, the Minister for Finance, Paschal Donohoe, was forced to reverse a decision to tax these soft loans. However, the Government now seems to be tackling the issue from a different angle. 

Under Capital Acquisition Tax (CAT) rules, a child can inherit €335,000 from their parents before they have to pay tax at 33%.

This has already changed from 2009, when a child could inherit €542,544 from their parents before having to pay tax at 22%.

For other loved ones,the tax-free threshold is €32,500 for close relatives, and €16,250 for distant relatives or friends.

The commission is recommending that the child’s current threshold of €335,000 should be reduced closer to these other two thresholds, over a period of 10 to 15 years.

The report is due to be published by Minister Donohoe on Wednesday. Its inheritance tax recommendations are expected to receive a lot of backlash.

The current rise in house prices has led families across the country to face huge CAT bills, because the homes that their children will inherit – even if they are not huge – are worth far more than the tax-free threshold of €335,000.

As well as the tax-free threshold decrease, the commission’s report has also recommended that child benefit should be kept, but not taxed. It has additionally suggested an increase in child benefit rates for low-income households.

The report also recommended that working family payments should be available to all households, not just those with children.

Only time will tell if these suggestions will be factored into Budget 2023, which is due to be announced on September 27.