Beware the populist decision on inheritance

Now the summer is over, the political world cranks back into full gear. And with a maximum of six months before an election, the talk is of the budget and what the government will do in it.

With the coffers full, the government will surely throw the kitchen sink at it and then go to the country. Being their last one, this one will appropriately be called the Late Late Budget. It’s likely there will be something for everyone in the audience, but raising the threshold at which Inheritance Tax kicks in is one thing we have heard a lot about and can definitely expect. Why is that particular idea being talked about so much?

It’s because, even with all the money available, it is politically wise to target what you do at those who are most likely to support you. That is a learning for this government. There was a sense that in its earlier days that the government spent too much time trying to please people who would never in a hundred million years vote for them. If that was indeed an illusion they were labouring under, they have overcome it. Any doubters couldn’t miss it in the local and European elections.

For the political lesson from those elections was that if you own your home, have a decent job or pension, and have private health insurance, then you vote for the government. When those people are eager to come out to vote, you can get pretty close to winning an election. The government has therefore calculated that the constant procession of complaining voices on the media won’t lose them the election, but not motivating the people most likely to vote for them well might.

So, how do you avoid that? Well, you find something that is on the mind of that particular group and you address it. Step forward, Inheritance Tax. It is simple enough really. The older and better off in Ireland understandably don’t like the idea that the state will take their money after they die. What’s the current position? Currently, a child can inherit €335,000 from their parent over the course of their lifetime. Anything over that, and a tax bill arises. The government are saying that the issue arises because of increases in house prices, bringing more houses over the €335,000 limit, and landing a child who inherits a house with a tax bill that means they might not be able to afford to live in it. That seems unfair when people have ‘paid taxes all their lives.’ That, Fianna Fáil and Fine Gael say, is why they want to raise the threshold of when the tax kicks in.

That all seems fair enough. Maybe it would be ok if the house in question actually went to one child, who chose to live in it as their family home. It would be especially right if that child had a disability of some kind, or had provided long term care for the parents. But in what percentage of inheritances does that actually happen? For if an increase in the Inheritance Tax threshold simply means that a parent can leave their house to several children, who can then sell it and share the proceeds without attracting any tax bill, then it gets more problematic, and certainly less fair.

Why? First because the €335,000 amount per child before tax kicks in is already pretty significant. Currently, if a parent left a one million euro house equally among their three children, assuming nothing else in the estate, no inheritance tax would arise. Does that really need to change?

But the major problem with increasing the threshold is different. If you bought your house before the Celtic Tiger era, the vast increase in its value has not come about from any action of yours, which may be blunt but remains true. It has come about firstly because the population has grown and so the demand and price of housing has gone up.

Second, family incomes have risen enormously and the amount of money made available by the European Central Bank has mushroomed, both of which have increased the amount people can borrow, causing house prices to inflate. In other words, houses in Ireland have mostly increased in value because of things done by actors other than the original home owners. Too many people in Ireland assume that buying a house in Ireland should itself make them wealthy – and that is wrong, because the excess is being paid by the young.

That isn’t a criticism of the home owner, but where the increase in value of many houses in Ireland was not earned, then the state taxing some of that large excess – and only that portion over 335k per child – is just a way of recouping some of that unearned amount back. The question of what should be subject to tax post your death may be emotive, but shouldn’t be avoided. Allowing people to pass on wealth purely gained by house price inflation has little social value, which is why it is different from passing on a business or a farm as a going concern, because in those there is productive economic activity, generating income and employment.

Of course, people who bought their houses a long time ago will rightly not like this way of looking at it. They will say that they paid high interest on their borrowing, and they will point out all the money they spent to maintain the value of the house. And perhaps there is an argument that if you spent large amounts of your earned income to improve a house, then the threshold on the house in inheritance should rise. One might argue that there would be more justice in this if the price of what the home was bought for was compared to its value at the death of the person who bought it. You can make all those arguments and fair play to anyone who does. But if making them, please please don’t tell us that this measure is about fairness.

Why? Because in 2024 Ireland the big problem when it comes to getting a house isn’t about inheriting one. Our priorities for the future should be ensuring that people who are not lucky enough to inherit a house should be able to get one. And this inheritance tax measure will do not one thing for them.

Now, you can argue that in the current context none of this much matters. With all the money coming in from Corporation Tax, wildly increasing year on year, this government – indeed any government – can do all things at once. They don’t have to make choices because there is so much money sloshing about that choice is meaningless, and they can cut taxes in other areas because we are awash with Corporation tax.

But the reality is that cutting taxes is normally wise only in two scenarios: when you start to fall into recession and you want to stimulate spending to ward it off, or where you take a political decision to restrain public spending in order to give citizens more of their own money back. If we – all of us – choose to ignore that tried and tested wisdom, then we are placing a risky bet on those corporation taxes continuing to rise. If they start to fall, we will be left with large public expenditures which cannot be met by an eroded tax base. Some inheritance that would make.