# Mirless report "Exemption from CGT on death should be ended"



## Protocol (12 Jan 2022)

https://ifs.org.uk/uploads/mirrleesreview/design/ch14.pdf
		


*15.4. CONCLUSIONS*

The arguments against taxing the normal return to life-cycle savings do not apply with equal force to the taxation of bequests and other transfers of wealth. There may be a particular case for taxing inherited wealth on equity grounds. Yet the current system of inheritance taxation in the UK is something of a mess. Its notable failings are largely to do with the fact that it is half-hearted and hence fails to tax the wealthiest.

By taxing transfers only on or near death, it allows the richest to organize their affairs to avoid taxation. Only those with very large amounts of wealth can afford to give most of it away several years before they die. And by exempting business assets and agricultural land, IHT creates distortions that have no economic justification and promote avoidance among those who can engage in tax planning. As Kay and King noted in 1990, inheritance tax favours ‘the healthy, wealthy and well advised’,28 and nothing much has changed in the 20 years since then to affect that judgement. Few can aspire to be rich enough to avoid inheritance taxation, but many aspire to wealth levels at which they would end up paying it. As currently structured, it therefore resembles a tax on aspiration.

It is not so surprising, therefore, that IHT is unpopular. Some countries have responded to similar concerns by abolishing their inheritance and transfer taxes altogether. Such responses inevitably make the retention of such taxes in other countries more problematic (in particular in the form adopted by the UK), given the increasing mobility of those who might otherwise find themselves subject to such taxes.

We do not believe the UK should move towards abolition. It is not required by the dictates of efficiency; nor is it justified in the face of great, and growing, inequality in wealth. But while there is a case to maintain some form of tax on inherited wealth, the argument for leaving things as they are is weak.

Whatever else is done, forgiveness of capital gains tax at death should be ended. As a way to offset the impact of inheritance tax, it is poorly targeted. But, in any case, no choice of a tax regime for wealth transfers justifies creating the bizarre distortions to asset allocation decisions that this policy does.

A minimal reform to inheritance tax itself would be to maintain it in more or less its current form but to widen its base to include business assets and agricultural property. There may in addition be a case for levying it at a lower rate than 40%, at least on an initial tranche of assets.

But the biggest barrier to the effective working of inheritance tax as it currently stands is that it is levied only at or close to death, allowing the wealthy to avoid it altogether by the simple expedient of passing on wealth well before they die. Put this fact together with the logic of such a tax, which suggests that a tax on the recipient makes more sense than a tax on the donor, and the case for a tax on lifetime receipts looks strong. That case does need to be balanced against the practical difficulties of implementation. Such a tax would have to depend on self-assessment. There may be particular issues arising from international mobility. But a movement towards a tax on lifetime receipts would be more defensible than the current system, both on grounds of fairness and on grounds of economic efficiency. The present halfway house simply provides ammunition to the abolitionists.


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## Brendan Burgess (12 Jan 2022)

Protocol said:


> Whatever else is done, forgiveness of capital gains tax at death should be ended. As a way to offset the impact of inheritance tax, it is poorly targeted. But, in any case, no choice of a tax regime for wealth transfers justifies creating the bizarre distortions to asset allocation decisions that this policy does.



This articulates very well  what I have been saying


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## Brendan Burgess (12 Jan 2022)

Protocol said:


> Put this fact together with the logic of such a tax, which suggests that a tax on the recipient makes more sense than a tax on the donor, and the case for a tax on lifetime receipts looks strong.



They proposed what we are doing in Ireland. 

There is very little difference between gift tax and inheritance tax.  And the tax is paid by the recipient and not the donor or their estate.


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## Brendan Burgess (3 Aug 2022)

An interesting discussion paper by the Congressional Research Service on the options for taxing capital gains on death. 



			https://crsreports.congress.gov/product/pdf/IF/IF11812
		


I can see no reason for not treating death as a disposal.   Sure, make provisions to ensure the continuity of family owned businesses. 

But it would solve some of the lock-in problems, where people hold onto assets which they would otherwise sell, to avoid a CGT liability.

Brendan


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## T McGibney (3 Aug 2022)

Brendan Burgess said:


> An interesting discussion paper by the Congressional Research Service on the options for taxing capital gains on death.
> 
> 
> 
> ...


CGT on death as well as CAT, or instead of it, Brendan?


Brendan Burgess said:


> But it would solve some of the lock-in problems, where people hold onto assets which they would otherwise sell, to avoid a CGT liability.


Would it? I'm not so sure. 

"I'm not selling and paying €100,000 in CGT, my estate can pay it if it has to, but the value might have fallen in the meantime anyway"


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## Brendan Burgess (3 Aug 2022)

T McGibney said:


> CGT on death as well as CAT, or instead of it, Brendan?



Pay the CGT first as everyone else does on disposal. 

But give a credit for it against any CAT which arises as they both arise from the same event. 

Brendan


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## T McGibney (3 Aug 2022)

Brendan Burgess said:


> Pay the CGT first as everyone else does on disposal.
> 
> But give a credit for it against any CAT which arises as they both arise from the same event.


But if they're levied at the same rate, the net additional yield to the exchequer will approximate to nil? And the calculations will be horrendously complicated.

At least there'll be more work and higher fees for accountants.


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## Brendan Burgess (3 Aug 2022)

T McGibney said:


> "I'm not selling and paying €100,000 in CGT, my estate can pay it if it has to, but the value might have fallen in the meantime anyway"



Hi Tommy

Under the current system, the argument against selling is even stronger 

"I'm not selling and paying €100k in CGT, as the liability disappears on my death" 

Brendan


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## T McGibney (3 Aug 2022)

Brendan Burgess said:


> Hi Tommy
> 
> Under the current system, the argument against selling is even stronger
> 
> ...


It is indeed stronger, but a stronger argument still is that it makes no sense to crystallise a large CGT bill at any given time unless there is a separate and compelling reason to sell or gift.


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## Brendan Burgess (3 Aug 2022)

T McGibney said:


> But if they're levied at the same rate, the net additional yield to the exchequer will approximate to nil?








Under my proposal, the CGT would be less than the CAT payable under the present system, where there is only one child. 

So it would have to be adapted that where this reduces the liability, that the higher CAT figure would apply. So in the second case, they would pay €200k CGT + €19,450 CAT.

Brendan


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## T McGibney (3 Aug 2022)

Brendan Burgess said:


> An example will illustrate this best.
> 
> Assets on death: €1m   Capital Gain: €600k
> CGT due: €200k
> ...


Good luck with implementing that in real life Brendan. It's like something that People Before Profit or Fintan O'Toole would come up with. Looks grand on paper until you start thinking about its implications.

Sorry for my bluntness, but it would be utterly insane to effectively deprive people of their already inadequate CAT thresholds, just because the asset they inherit is not in the form of cash.

Is the exchequer *that *stuck for extra tax money?


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## Brendan Burgess (3 Aug 2022)

Hi Tommy

It achieves two objectives: 
Overall fairness in the tax system.  We have no Wealth Tax in Ireland, so we should have proper property taxes, CGT and CAT. 

And yes, to boost the tax take.

Can you suggest any reason why death should not be deemed  a disposal for CGT purposes? 

Brendan


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## Bow tie (3 Aug 2022)

Brendan Burgess said:


> Hi Tommy
> 
> It achieves two objectives:
> Overall fairness in the tax system.  We have no Wealth Tax in Ireland, so we should have proper property taxes, CGT and CAT.
> ...


How is it overall fairness in the tax system to retax something again a third time, solely based on the transaction type? And in this example- death, which people don't really have a choice in!
The income used to buy the asset has already had tax levied. And then additional tax such as property tax yearly, duty etc. (depending on the asset).

For the vast majority of the populace any meagre 'wealth' they leave in the form of property should not be taxed any further than 33% after limit. I'd argue perhaps it should be reduced even!


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## Brendan Burgess (3 Aug 2022)

Bow tie said:


> How is it overall fairness in the tax system to retax something again a third time,



Hi Bow tie

If your argument is valid, then it would be an argument against Capital Gains Tax itself.

"I bought my shares in CRH out my taxed income. I paid tax on the dividends. So I should not pay tax again on the capital gain when I sell them." 

But double taxation is common.

I pay income tax on my income.
I paid VAT on the purchase of my home. 
I pay property tax on the value of my home.



Bow tie said:


> For the vast majority of the populace any meagre 'wealth' they leave in the form of property should not be taxed any further than 33% after limit.



Again, a slightly different argument.  It could be argued that that there should be a lifetime exemption of [€20,000] worth of capital gains.  ( I feel another submission coming on...). And after that, 33% tax. 

Brendan


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## T McGibney (4 Aug 2022)

Brendan Burgess said:


> Can you suggest any reason why death should not be deemed  a disposal for CGT purposes?


That's easy Brendan. It's utterly unnecessary and would lead to a whole host of anomalies and other unintended consequences including the possibly of serious injustices. It is also practically infeasible. 

The CGT code as presently constituted is riddled with injustices, which your proposal if implemented would compound.


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## Brendan Burgess (4 Aug 2022)

T McGibney said:


> would lead to a whole host of anomalies and other unintended consequences including the possibly of serious injustices.



It actually removes an anomaly and an injustice. 


But maybe that is a matter of opinion.

Brendan


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## T McGibney (4 Aug 2022)

Brendan Burgess said:


> It actually removes an anomaly and an injustice.
> 
> 
> But maybe that is a matter of opinion.


Apples and oranges argument Brendan, sorry.


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## Brendan Burgess (10 Aug 2022)

The ESRI also questions why Capital Gains are exempt at death:



			https://www.esri.ie/system/files/publications/BP202201.pdf#page=42
		


Page 36 (PDF 47)

_Other CGT reliefs

At present, no CGT is levied on assets transferred at death. Instead, such assets are treated as being acquired at their market value by the beneficiary at the date of the original owner’s death if and when the beneficiary comes to dispose of them.  

While  such  treatment  is  sometimes  supported  on  the  grounds  that  it prevents the double taxation of bequests that are subject to CAT (e.g. Commission  on Taxation, 2009), there also exists a CAT credit available to beneficiaries for CGT paid by disponers on certain assets.27 In any case, Adam et al. (2013) point out that double taxation is inherent to the taxation of wealth transfers, with CGT designed to serve an entirely different purpose (the taxation of the returns to saving) and no equivalent relief for income tax already paid on gifts or bequests. Exempting assets transferred at death from CGT creates an extremely strong incentive for older individuals to hold on to assets, such as investment properties, until death in order to bequest them tax-free to children, potentially contributing to lower levels of living standards and higher rates of poverty through retirement (Beirne et al.,
2020)._


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## cremeegg (10 Aug 2022)

The whole idea of tax arising on disposal is foolish. Of course it arises because that is when there is cash.

An annual wealth tax (levied at the risk free rate of return times the rate of income tax) is a far better way to tax wealth, or less rigorously 1.5%

I buy an investment for €100,000, annual tax €1,500 (assuming rfrr 5%, income tax 30%) 
The investment is revalued each year and the annual tax based on that.
No tax payable on sale or death.

Income is taxed, consumption is taxed, VAT, investment is taxed. Equitable all around.


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## Brendan Burgess (10 Aug 2022)

So my wealth is taxed but if I have anything left, my children pay nothing?

We have different ideas of what "equitable" means. 

Brendan


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## Purple (12 Aug 2022)

cremeegg said:


> An annual wealth tax (levied at the risk free rate of return times the rate of income tax) is a far better way to tax wealth, or less rigorously 1.5%


That would be a very high rate on property. If my million Euro house went up in value by €50k in a year I'd have to pay an extra €25k in tax or €15'750 at 1.5% on the new value of €1,050,000.


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## cremeegg (15 Aug 2022)

Yes, If your house was worth €1,050,000 you would have to pay €15,750 tax each year. People would stop hoarding housing. Use or move. 

 A high rate? I think that says more about the distorted housing market than anything else. 1.5% is not of itself high. 

The price of houses would fall. The population density of housing would rise. Both positives for society. 

There would be no CGT nor CAT both positives for the individual.


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## Sophrosyne (15 Aug 2022)

cremeegg said:


> People would stop hoarding housing. Use or move.


What does that mean?


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## Purple (15 Aug 2022)

cremeegg said:


> Yes, If your house was worth €1,050,000 you would have to pay €15,750 tax each year. People would stop hoarding housing. Use or move.
> 
> A high rate? I think that says more about the distorted housing market than anything else. 1.5% is not of itself high.
> 
> ...


I agree with you, thanks for clarifying.


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## Purple (15 Aug 2022)

Sophrosyne said:


> What does that mean?


People would be more likely to trade down as they get older fewer/none of their children live in the house.


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## Sophrosyne (15 Aug 2022)

How would that help the housing market?


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## Purple (15 Aug 2022)

Sophrosyne said:


> How would that help the housing market?


One of the biggest issues we have is that our average household size (number of people living in a property) is declining. That means we need more houses for the same amount of people. In 1991 it was 3.34 people per household. It's currently 2.75. That means we need 18% more housing units for the same number of people. In other words that statistic accounts for 360,000 housing units. At €250k per unit that's €90 billion. 

Older people living longer and staying in their family home is a large driver in that statistic. Of course we'd need suitable places for them to trade down to in their local area for that to work. There's no point is looking to engineer an outcome which isn't available.


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## T McGibney (15 Aug 2022)

cremeegg said:


> Yes, If your house was worth €1,050,000 you would have to pay €15,750 tax each year. *People would stop hoarding housing. Use or move.*


When domestic rates were either introduced or dramatically escalated in the early 1970s, owners avoided it by literally demolishing superfluous housing or systematically reducing them to an uninhabitable state. It meant inter alia the permanent loss of countless heritage properties.

Your proposal would be likely to have the same result.


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## Sophrosyne (15 Aug 2022)

Purple said:


> Older people living longer and staying in their family home is a large driver in that statistic. Of course we'd need suitable places for them to trade down to in their local area for that to work. There's no point is looking to engineer an outcome which isn't available.


Well I'm glad someone else realizes that.

I don't know what type of housing is most in demand at present, but I suspect it is not 5 bedroom + properties.

In addition people who buy older houses might not always know what they are buying. It could be a money pit.


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## Purple (15 Aug 2022)

T McGibney said:


> When domestic rates were either introduced or dramatically escalated in the early 1970s, owners avoided it by literally demolishing superfluous housing or systematically reducing them to an uninhabitable state. It meant inter alia the permanent loss of countless heritage properties.
> 
> Your proposal would be likely to have the same result.


How big an issue was that? Do you know what the numbers were?
I suspect a tax that was weighted in favour of the site value would mitigate that problem but of course that would be more complex to calculate.


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## jpd (15 Aug 2022)

In 2004, I had a planning application for replacing 2 4-bedroom houses in a Dublin suburb with more suitable 2/3-bedroom appts so that older people could downsize and live in the same area - blown out of the water completely.

What I learned from that was that the NIMBY brigade was well and truly in charge - and still are in most places.

So no traction in planning moving older people out of 4-beds into smaller units in the same area


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## T McGibney (15 Aug 2022)

Purple said:


> How big an issue was that? Do you know what the numbers were?


No idea on either count. I was very young at the time. It appears in retrospect to have been common enough in the case of historic houses that are now recorded as having been demolished or abandoned around that time, but anecdotally seems to have been rife in the case of ordinary homes. Both of my grandparents' homes (where my parents respectively grew up) were dealt with likewise around that time, one demolished and the other converted to agricultural use.


Purple said:


> I suspect a tax that was weighted in favour of the site value would mitigate that problem but of course that would be more complex to calculate.


It might mitigate a repeat to an extent in urban centres for example in places like Mountjoy Square that were badly run down in the 70s but a site tax won't work too well in that respect in the likes of Castle Saunderson, where the current site value is probably negative.


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