A changing political landscape: Actions you can take

With election season looming over the horizon, many of our client conversations have centred around a potential change in government and how this could impact their financial plans for their wealth. Political landscape aside, tax reform appears to be on the agenda with various reports issued and ongoing public consultations. This article touches on some of the key potential tax changes for our clients and actions that can be taken.

Key changes on the horizon

(i) Capital taxes and wealth tax

While focus has been on a possible change in leadership, many potential changes in the tax landscape are contained in the Commission of Taxation report that was published in 2022. This made recommendations on the current taxation and welfare system. While there is no guarantee that all of the recommendations will be introduced, most of them point towards a less favourable tax environment.

In terms of the political environment, we can see that Sinn Féin has softened its stance somewhat with regard to the possible introduction of a wealth tax. The Commission of Taxation report also recommended that there would need to be a substantial overhaul of capital taxes before a wealth tax was introduced. As such, we believe a wealth tax is less likely to be imminent.

The 2023 and 2024 Sinn Fein alternative budgets together with recent media rhetoric do point toward a higher rate of tax for high earners as well as increases to Capital Acquisitions Tax (CAT) and Capital Gains Tax (CGT). CAT in the form of a reduction of thresholds is also recommended by the Commission report.

(ii) Pensions

While the last few years have seen a significant change in the pensions landscape, more changes are underway. On the positive side, we are hopeful that there will be an increase in the Standard Fund Threshold (SFT). We participated in a Department of Finance consultation on the subject and should hear more in late summer. The government aim is to address inequalities between the public and private sector pension systems and to address the eroding value of the SFT (due to inflation) which has been set at €2m since 2014.

We also see the ongoing drive towards pension simplification as likely to continue, which we support. The Finance Act 2022 already removed Benefit in Kind (BIK) on employer contributions into Personal Retirement Savings Accounts (PRSAs), which has since allowed business owners to make unlimited contributions to PRSAs. A change in leadership could aim to restrict this, judging by recent Dail questioning.We have outlined what we believe are tax key areas of focus under the Commission of Taxation report, the last two Sinn Féin alternative budgets and the current Government stance (using the last two budgets and Finance Acts as reference) in the table below.

Figure 1: Summary of potential changes to taxation and pensions

Source: Report of the Commission on Taxation and Welfare; Sinn Fein website

(iii) Tax treatment of Funds

During Budget 2023, the Minister for Finance committed to establishing a working group to consider the taxation of funds, life assurance policies and other investment policies. This working group was established in 2023 with a public consultation period.

Davy made a submission on behalf of clients. We believe that the tax code shouldn’t incentivise investors away from funds. There is clearly a flaw in the legislation if investors are avoiding highly regulated and diversified investments which are suitable for them because the tax treatment of different investments is more favourable.

We would like to see far more simplicity in the tax code for clients who hold funds. For example, the rate of exit tax (41%) should be the same as CGT (33%). Losses on one should be deductible against gains on other funds.

While the working group is set to report back to the Minister during the summer of 2024, it is not clear when any potential changes could come about. We will keep a close watch and continue to advocate on behalf of clients.

Potential actions

While it is difficult to get ahead of what form changes will take, and when they will be implemented, if at all, there are some steps that we feel should be considered.

1. Where your asset base is surplus to your lifetime needs, consider passing assets now, utilising current tax rates and gifting thresholds.

2. If control is a concern, consider putting in place a structure that will allow future asset growth to accrue to your beneficiary/ies while you retain control of the asset (e.g. a family partnership). Your financial plan will help identify those potentially surplus assets and help tax efficiently plan for the transition of wealth to the next generation in a manner that’s aligned with your values.

3. Loans between family members can also be seen as an efficient alternative to making an outright gift of funds. It is important to note that there are some new filing obligations in respect of family loans which means that details will need to be provided to the Revenue. This is a new obligation of which clients should be aware. If applicable, we would recommend that you review any loan arrangements in place to see if the filing obligations could apply.

4. Company pension funding should also be explored while the opportunity remains, particularly for business owners as this may not be as favourable in the future. Davy works extensively with business owners and their tax advisers to ensure this opportunity can be capitalised in a manner that makes sense for you.

5. We encourage you to review your current pension arrangements to ensure you are in a position to act quickly if changes are brought through. Consolidating your pensions into one pension arrangement and working with an advisor with retirement planning expertise can remove a lot of administrative burden down the line and ensure an optimal strategy can be deployed.

6. Regarding the SFT, if you are at or above the current SFT and retirement is on the horizon, pending any upcoming changes, we suggest you speak with your Davy advisor before making any imminent decisions. Taking a wait-and-see approach, for example, may make sense, however, every case will be different.

If you’re an existing Davy client now might be a good time to contact your advisor to review your financial plan and actions you can take. If you’re not a Davy client, why not request a call today to discuss creating your bespoke financial plan?