Top tax takeaways from Budget 2025 by University of Limerick expert

Dr Brendan McCarthy, Assistant Professor of Tax at University of Limerick, breaks down the key tax measures introduced in Ireland’s Budget 2025.

From the long-awaited participation exemption in corporation tax to adjustments in capital acquisitions and capital gains taxes, Dr McCarthy analyses how these changes will impact businesses, investors, and families.

He also highlights the winners and losers of VAT changes, offering insights into the broader implications of these measures for Ireland’s economy and tax landscape.

Corporation Tax

The introduction of the Participation Exemption into Irish tax legislation, announced in Budget 2025, is a welcome move. Ireland has heretofore taxed income on a worldwide basis, irrespective of where that income arose, with a credit for any foreign tax paid.

This new long-awaited legislation will mean that, with effect from 1 January 2025, qualifying foreign dividend income will be entirely exempt from Irish corporation tax (CT) in the hands of the recipient company, thereby simplifying the overall process.

Not only will this remove the need for what are often complex, time-consuming calculations, it will align Ireland’s position much more closely with that of most EU Member States and OECD countries.

This measure could not have come at a better time. Ireland’s ongoing housing crisis, as well as major infrastructure problems nationwide, present international investors with serious pause for thought.

These risks are arguably compounded by Ireland’s over-reliance on corporation tax receipts in recent years. Indeed, in their pre-Budget 2025 statement, the Irish Fiscal Advisory Council warned that with only a handful of companies accounting for more than 40% of the country’s corporation tax haul each year, together with an abundance of high-pay, high-tax jobs, Ireland’s taxes are currently overly concentrated.

Critically, they warn that should one or both of these situations be reversed, this would jeopardise the Irish Government’s Budget promises at the very time the people would need them the most.

The shift towards a territorial tax system, exemplified by the Participation Exemption, will arguably help to alleviate some of the anxiety currently felt by risk-averse international investors.

The reason for this is simple: investors want certainty. They want the peace of mind that comes from a simple, straightforward compliance process. The introduction of the Participation Exemption will remove the need for complex calculations, while also reducing and simplifying the administration and overall compliance burden.

This, together with the continuation of the 12.5% corporation tax rate for all but the largest trading companies, will not only deliver on this certainty but will enhance Ireland’s attractiveness as a destination for multinational investment at a time when maintaining global competitive edge has never been more important.

Capital Acquisitions Tax

The €65,000 increase in the Group A ‘parent to child’ threshold was well signalled in advance of Budget 2025. The increased threshold means that a parent can now give up to €400,000 in value to a child during that child’s lifetime before he/she suffers capital acquisitions tax (CAT) at 33%.

As most people will understandably associate CAT with inheritance tax, and indeed with the inheritance of a property, this increase in the threshold should go a long way towards alleviating some of the anxiety associated with being faced with a tax bill on the passing of a parent, especially at a time when house prices in this country continue to soar.

Yet the question remains: who will benefit from this? Only a small number of people in this country actually end up having to pay tax on an inheritance. Indeed, it is estimated that no more than 2-3% of households will ever receive an inheritance in excess of the tax-free threshold.

Moreover, when we consider that the tax-free threshold is per beneficiary, in other words that each child will now be able to receive up to €400,000 from a parent before paying tax, as well as the various different tax reliefs and exemptions on offer, it is arguable that it is only the very wealthy who stand to benefit from the increase in the threshold.

Nevertheless, this move is consistent with the tax policy of successive Irish Governments to date: Ireland taxes income, not wealth, with any suggestion of taxing the latter often being met with strong resistance (such as when the Local Property Tax was introduced).

This is arguably because the vast majority of wealth in this country is wrapped up in property, and hence taxing peoples’ wealth would be tantamount to taxing peoples’ property, which most people would inevitably associate with taxation of the family home.

There is a phrase often associated with the late US Speaker of the House of Representatives, Tip O’Neill, which says that ‘all politics is local’. Well, politics is very local in Ireland; it is personal; it is tangible, and this is particularly true of tax policy.

So when it comes to the taxation of wealth in this country, to the taxation of property, and hence to the taxation of the family home, for the people of Ireland it doesn’t get more personal than that.

Capital Gains Tax

Retirement Relief reduces the amount of capital gains tax (CGT) payable by an individual who has reached the age of 55 years and disposes of business assets. This relief, which despite its name does not actually require the individual to retire, is vital to the longevity and continued success of family-owned businesses. They are the back-bone of the Irish economy, employing upwards of two thirds of private sector employees nationwide.

The level of Retirement Relief available varies, depending on the age of the disponer and his/her relationship to the recipient, and Finance Act 2023 introduced significant changes in this regard.

These changes, which are due to come into effect in 2025, place a cap of €10 million on the market value of business assets that can be disposed of to a child once the disponer is aged between 55 and 69. This cap falls to €3 million thereafter.

There have been calls from some quarters for this cap to be abolished, reasoning that it will act as a barrier to the lifetime transfer of Irish businesses to the next generation. On the one hand, it is conceivable that disponers will be exposing themselves to potentially hefty CGT bills by disposing of their businesses during their lifetimes.

On the other hand, by delaying this disposal indefinitely, businesses will be missing out on the opportunity to benefit from an influx of ‘new blood’ and new ideas. Moreover, it is arguable that the longer they delay, the less likely the next generation will be interested in taking up the mantle.

So, call it what you will: a cap, a threshold, a limit: it is, in effect, a barrier to the lifetime transfer of businesses to the next generation and manifestly contra to the spirit of the legislation.  It is telling that even though it was first spoken about in 2023, these changes are not due to come into effect until 2025, suggesting that even those in Government have doubts about its virtues. It is regrettable that Budget 2025 made scant reference to Retirement Relief.

Perhaps it is time for more in-depth analysis and reflection on these changes. At the very least it should be reconsidered – if not retired – altogether.

Value Added Tax

In terms of Value Added Tax (VAT), there are winners and losers in Budget 2025. In terms of the winners, there is a continuation for a further six months of the 9% VAT rate for household electricity and gas.

VAT affects everyone’s pockets, and so this move will have a significant impact at a time of continued high cost of living. Indeed, the estimated saving of €90 on the average annual electricity bill, and €60 on the average annual gas bill, as a result of this measure will undoubtedly be warmly welcomed by Irish households.

What is unlikely to be so warmly welcomed, however, is the failure to reduce the VAT rate for the hospitality sector back to 9%. Last year saw the VAT rate rise to 13.5% and, despite significant lobbying, it was not widely anticipated that Budget 2025 would see this revised downwards.

Nevertheless, Ireland is a small, island economy dependant on tourism with many hundreds of thousands of people employed in the sector. When faced with the higher rate of VAT, these businesses are now faced with passing on the increased costs to their customers (threatening demand) and absorbing the costs (threatening the viability of their businesses).

Their ultimate decision will inevitably see somebody left out in the cold.