Michael McGrath (Cork South Central, Fianna Fail)
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101. To ask the Minister for Finance his plans to review the way in which capital acquisitions tax is applied, in particular in respect of inheritance of the family home; if he will consider an annual indexation of thresholds, and a reduction in the rate on interest which applies to persons, who by virtue of their circumstances need to pay a capital acquisitions tax bill by instalments; and if he will make a statement on the matter. [24813/15]

Michael McGrath (Cork South Central, Fianna Fail)
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This question relates to inheritance tax. From 2009, the thresholds for the different bands were reduced dramatically. The threshold for parent to child inheritance, for example, fell by almost 60% over the period. That has resulted in an increase of 34% in the number of people liable for inheritance tax. What plan does the Minister have to address the issue? I also touch on the issue of the interest rate that applies when people decide to pay by instalment and the issue of annual indexation of thresholds.

Michael Noonan (Limerick City, Fine Gael)
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This issue has been raised with me by Deputies and others in recent months and I am conscious of the concerns involved. Capital acquisitions tax, CAT, applies to the beneficiary of a gift or inheritance rather than to the person making the gift or inheritance. Whereas the rate of CAT is 33%, each person has a number of lifetime thresholds for gifts and inheritances which they can receive tax-free. These are based on the relationship to the person who has made the gift or bequest.

The group A threshold of €225,000 applies primarily in cases where an asset passes from a parent to a child. The group B threshold of €30,150 applies primarily to transfers between other close relatives. The group C threshold of €15,075 applies between more distant relations and people who are not related. The 33% rate of CAT applies on assets received by a person above the relevant threshold. Gifts and inheritances between spouses and civil partners are exempt from CAT.

Over the past number of years, the CAT thresholds have been reduced a number of times, while the rate has increased. These changes were necessary in order to maintain the yield from capital taxes in a period of falling asset prices so that such taxes would continue to make a contribution to our efforts to consolidate the public finances. Moreover, the views of the OECD, supported by our own economic research, is that taxes on property and other fixed capital, such as CAT, are less harmful and distortionary to economic growth than taxes on work or consumption. As the economic recovery continues to take hold, I began this year to focus available resources on reducing the burden of taxation on earned income and take-home pay where high taxes impact on competitiveness, economic growth and job creation. That will continue to be my main focus. That said, I recognise that recent growth in property values has implications for the liabilities that can arise from capital acquisitions tax. It is for this reason that, as I have said in response to a number of other recent parliamentary questions on this matter, I am reviewing the various aspects of this tax in the context of the preparations for budget 2016 and the subsequent finance Bill.

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I am not in a position, nor would I intend to say at this point, what specific changes I may or may not propose. With regard to the Deputy's specific concerns, however, I will make a few general comments.

When considering the inheritance of a family home, it is worth noting the existence of the CAT dwelling house exemption, which allows for a property to be inherited tax-free when the inheritor is already living in the home. While certain restrictions apply to ensure proper use, this exemption is designed to prevent cases of hardship or displacement for inheritors who are home sharers. The Deputy asks whether I would consider indexing the thresholds. The thresholds were previously indexed to inflation through the consumer price index. This link was broken following the financial crash as inflation was positive while property values were declining considerably. Fixed property makes up a large proportion of gifts and inheritances, especially inheritances. The question of whether it might be appropriate to index the thresholds in the future is a matter I will examine. A number of issues must be considered in this regard, including, for example, the availability of an appropriate index and the current functioning of the property market in general.

When a person who receives a gift or inheritance is not in a position to pay the CAT charge arising in one go it may be possible, in certain circumstances, to arrange to pay the tax by instalments. It is appropriate that in such circumstances interest be applied to the payments. However, tax legislation gives the Revenue Commissioners the discretion to allow payment of CAT by instalments, where this is not otherwise allowed, on a concessionary basis in exceptional circumstances where the tax cannot be paid without excessive hardship. In cases of hardship, the Revenue Commissioners also have the discretion to allow payment to be postponed for such a period and on such terms, including the waiver of interest, as they think fit. The Revenue Commissioners will consider each case on its merits, taking into account both the financial circumstances of the beneficiary and the nature of the gift or inheritance involved.

Michael McGrath (Cork South Central, Fianna Fail)
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I welcome that the Minister is reviewing a number of aspects of the inheritance tax regime because we have been through a very fraught and difficult number of years. The fact that the threshold for gifts from parents to children has reduced by almost 60% since 2009 is quite stark. We now have a toxic combination of that drastic cut in the threshold, the increase in the rate from as low as 20% to 33% and, now, rising property values. That has resulted in 34% more people having to pay inheritance tax over the past four years. The yield has increased dramatically from €186 million in 2010 to an estimated €400 million in 2015.

This is an issue as people like to leave an inheritance if they can for a family but neither families nor the people leaving an inheritance like the idea of paying a big chunk of that to the Minister. I am sure he accepts that. The thresholds must be addressed and I would like to see the indexation of the thresholds revisited, along with the interest rate - at almost 8% - which applies when somebody decides to pay the inheritance tax liability over a number of years.

Michael Noonan (Limerick City, Fine Gael)
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I am reviewing the whole ambit of the texts in the context of the forthcoming budget. The Deputy asked whether I would consider indexing the thresholds. The thresholds were previously indexed to inflation through the consumer price index, but this link was broken following the financial crash, as inflation was positive while property values were declining considerably. We want to be sure in what direction values are going before we index. The other thing that is not generally known is that there is a capital acquisitions tax dwelling house exemption, which allows for a property to be inherited tax-free where the inheritor is already living in the home. If a son or daughter is the carer, is living in the home and inherits the property, they have no tax liability, regardless of thresholds. The thresholds only apply to people who are not living in the home and who inherit.

Michael McGrath (Cork South Central, Fianna Fail)
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I thank the Minister for his reply. Reading between the lines, we are likely to see some movement on this issue in the budget in October. I hope it is a significant move because the changes made over the last few years have been quite drastic. This situation has been created by the increase in the number of people who are liable for inheritance tax, the significant increase in the rate, the dramatic cut in the thresholds and the rise in property prices over the last couple of years. Elderly people who are in a position to do so like to leave an inheritance to their children and they do not want much of that inheritance to be paid to the State by way of capital acquisitions tax. The issue needs to be addressed. I hope the Minister makes a significant move and examines the issue of indexation and the situation facing people who inherit a home and want to keep it but who find a large inheritance tax liability has crystallised. Under the existing arrangements, they can pay by instalments, but the interest rate is in the region of 8% per annum, which is quite punitive for many people. As part of the Minister's review, we should investigate whether that situation can be eased.

Michael Noonan (Limerick City, Fine Gael)
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I will review the situation and I will take into account what the Deputy has said for the review.