Tax changes promised in the Government programme for partnership will sharply cut or eliminate completely inheritance tax for thousands of people in the coming years.

Under the changes, once they are implemented, children inheriting the family home will not pay tax on the first €500,000 value of the estate, which should mean the majority of bequests will not prompt tax demands.

However, while the Government is planning to raise the threshold, it is not proposing to cut the 33 per cent tax rate applied to bequests over the threshold.This rate increased in 2009 from 20 per cent.

In the last budget, Minister for Finance Michael Noonan increased the thresholds – which had fallen after the economic crisis broke in 2008 – from €225,000 to €280,000.

Now the threshold is to be raised to €500,000 – in line with a pledge by Fine Gael, but one which it has not trumpeted since the formation of its minority Government.

Annual cost

In its manifesto, Fine Gael said: “We will improve the tax treatment of gifts and inheritances from parents to young adults, by increasing the capital acquisitions group-A threshold to €500,000.”

In a nod to the new arithmetic in the Dáil, the Government programme for partnership emphasises the need for cross-party agreement.

“Finally, we will work with the Oireachtas to raise the band-A capital acquisitions tax threshold (including all gifts and inheritances from parents to their children) to €500,000,” it says.

However, the Government will not change the thresholds that apply to bequests given to or by brothers or sisters, uncles or aunts, or grandparents – nor the smaller thresholds for people who are not related.

The tax-free threshold for those belonging to “group B” – a parent, brother, sister, niece, nephew or grandchild, will remain at €30,150. Similarly, “group C”, all other relationships, will inherit €15,075 tax-free. The threshold covers all bequests cumulatively. A senior Fine Gael source said there were no plans to raise the threshold of non-parental gifts, as the “main political issue” was family homes generating substantial tax liability when passed on .

Declining threshold

In 2011, it fell to €250,000, before reaching €225,000 a year later. Since then, Mr Noonan has faced lobbying to change policy, amid claims of hardship. In a pre-budget submission, the Institute of Professional Auctioneers and Valuers said the reductions had been “understandable in the climate of falling asset prices and falling property prices”.

However, the situation has changed: “Many people now face the prospect of liquidating the family home on the death of an elderly parent to meet the inheritance tax liability ,” the IPAV then said.