Opinion: Inheritance tax changes in the budget have brought some relief, but not enough

05 Oct 2024, 08:00 by Johnny O’Callaghan, https://www.thejournal.ie/author/johnny-o’callaghan/ · TheJournal.ie

LAST UPDATE | 1 hr ago

BUDGET 2025 BROUGHT in some long-awaited changes to Capital Acquisitions Tax (CAT) also known as Gift Tax or Inheritance Tax, and these updates should make life a bit easier for many families in Ireland who are dealing with this tax. Let’s dive into the details and what they mean for you and your family.

1. Increased CAT Thresholds: A welcome relief

One of the headline changes is the increase in CAT thresholds, which determines how much you can inherit or receive as a gift before getting hit with the 33% tax. Here’s what’s new:

The Group A threshold (for inheritances from parents to children) has gone up from €335,000 to €400,000. This is great news for families, especially with the steep rise in property prices across Ireland.

The Group B threshold, which covers inheritances from grandparents, siblings, nieces, and nephews, has increased from €32,500 to €40,000.

The Group C threshold, covering distant relatives and non-relatives, now sits at €20,000, up from €16,250.

This means that if you’re inheriting from your parents, you can now inherit up to €400,000 without paying CAT. Let’s say you inherit a home worth €400,000 — under the new rules, you’re in the clear.

Before, with the old threshold, you would have paid tax on the €65,000 over the €335,000 limit, resulting in a €21,450 bill. So this increase can make a real difference for families who are passing on homes or other assets.

2. Agricultural Relief: A new condition

There was a tightening of the conditions for Agricultural Relief. While this relief still allows a 90% reduction in the taxable value of agricultural land, Budget 2025 introduced a new requirement: the donor (the person passing on the farm) must meet a six-year active farmer test for the beneficiary to benefit from the relief.

This change is designed to ensure that farmland remains in productive use and is passed down to individuals who will actively farm or lease it to someone who will, but will be seen by many as yet another onerous condition to be met when passing on the family farm.

3. What didn’t change?

The 33% rate of CAT was unchanged, and many will feel that this rate is simply too high despite the increased thresholds. The amount for the annual small gift exemption of €3,000 also remained unchanged and is another relief that has simply not kept pace with inflation, however it is still a very valuable tool in your tax planning arsenal which is unfortunately overlooked by many.

The changes to Capital Acquisitions Tax (CAT) in Budget 2025 represent a positive step forward, particularly for middle-income families. The increase in the Group A threshold from €335,000 to €400,000 will help many people avoid the burden of a large inheritance tax bill when inheriting homes or other assets, which is especially critical in light of rising property prices.

For farmers, the continuation of agricultural relief, though with more stringent conditions, means that farm succession can still happen without overwhelming tax obligations, provided careful planning is in place.