Why we can expect the expected on personal taxation

Upcoming budget set to deliver predictable tweaks to personal taxation, with a focus on inheritance tax relief for families and potential support for self-employed individuals through the abolition of an income surcharge.

In brief

• No major budget shocks; minor USC cut and tax band tweaks for slight pay increase.
• Inheritance tax threshold may rise to ease middle-class burden.
• Possible end to 3% surcharge on self-employed income over €100,000.

The days of major budget day shocks and surprises are well gone. The contents of the budget speech are either pre-announced in the Summer Economic Statement or so well telegraphed in advance that the capacity to catch people unawares is almost non-existent.

In these circumstances we should not expect any revolutionary or transformative personal taxation changes in October’s budget. Income tax rates will remain unchanged, there will likely be a minor reduction in the base rate of USC, and the bands will move slightly ahead of inflation and wage growth to deliver a small increase in take home pay.

One area that could be in for a relatively significant change, however, is inheritance tax. This particular political football was put in play earlier this year and has been carried by a number of backbenchers and Government members since. So successful has this campaign been that the voices of opposition to a change have almost been silenced.

The argument in favour of change is straightforward. The Capital Acquisitions Tax (CAT) rate for gifts and inheritances is 33% and the lifetime threshold for gifts and inheritances received by a child from their parents is €335,000.

The threshold hasn’t been adjusted for several years and is significantly lower than the €542,544 it stood at back in 2009. The absence of an outcry following the quite dramatic reduction back then was mainly due to the equally dramatic fall in property values.

Property prices have recovered since then and are significantly above pre-crash levels in most cases. Proponents of an increase in the threshold argue that this exposes quite ‘ordinary’ middle class families to CAT and could force children to sell the family home if they hadn’t been living in it at the time of inheritance. There is already an exemption in place where a child who has been living with their parents inherits the family home and will continue to reside there, subject to meeting other conditions.

All the signs are that the argument has been accepted within Government and the only question now is the quantum of the increase. While no further exemptions are expected and there is no cause to expect that the 2009 rate or anything near it will be restored, there is a strong belief that an increase to around €400,000 is on the cards.

There is less certainty around B and C threshold for other relatives and so-called strangers under law. The B threshold generally applies to a parent, brother, sister, niece, nephew or grandchild of the person giving the gift and currently stands at €32,500. Group C applies to all other relationships and is €16,250. Historically these have moved at the same time as Class A; however, the last two changes in the class A threshold have seen the B & C thresholds stay the same. Therefore, it is by no means certain that we will see any movement in these thresholds on October 1st.

One other significant change we might see in October is the abolition of the 3% surcharge on non-employment income over €100,000.  This means that the maximum rate of USC for employees is 8% whereas for a self-employed individual it is 11%. This surcharge was a temporary measure introduced during the downturn but has never been reversed.

The surcharge is seen by many as a tax on enterprise and entrepreneurship and there has been a strong lobby for its abolition for a number of years. The argument is that entrepreneurs are the main engine of employment creation, yet they are being unfairly penalised by the tax system.

This argument has found favour with Taoiseach Simon Harris who stated recently that the surcharge on self-employed income is “unfinished business” for Fine Gael and mut be abolished.  He went on to call it a “perverse state of affairs” that those who risk the most are penalised the most.

Based on those comments, we would expect to see an abolition of this surcharge in the upcoming budget.

Budgets may be a bit more predictable than they used to be and there is not much excitement in expecting the expected, but it is far better than the alternative where finance ministers attempt to pull proverbial rabbits out of hats in an effort to balance the books.