Inheritance tax is a concept that many of you may have heard of but haven’t given much thought to. This is likely due to the fact that many perceive it to be a tax that only affects the very wealthy, however, this is not the case. Inheritance tax can be a significant financial burden for those who inherit property or assets in Ireland and is often not thought about until it’s too late. Combine this with the fact that the issue of inheritance tax will most likely arise at an already stressful and difficult time in your life, without proper planning, you could have a real problem on your hands. In this blog, we want to provide you with the tools and information to ensure that doesn’t happen. With some careful planning and knowledge of the options available to you, it is possible to minimise or even avoid inheritance tax altogether.
Inheritance tax is a tax levied on the estate of a person who has passed away. From a tax perspective, in Ireland, inheritance tax is referred to as Capital Acquisitions Tax (CAT). CAT is a tax paid on gifts and inheritances received. In 2019 alone, over €522 million worth of Capital Acquisition Tax was paid in Ireland. This from a total of €1.6 billion worth of gifts and inheritance.
The current rate of CAT in Ireland is 33%, and it applies to the value of the inheritance over a certain threshold over the course of your life. Once you pass a set threshold of received gifts and inheritance, you must pay 33% tax on this surplus amount.
The threshold amount for Capital Acquisitions Tax depends on the beneficiary’s (the person receiving the gift/inheritance) relationship to the disponer (the person who is gifting, or in the case of inheritance, the deceased who’s estate is being inherited). It is split into three groups:
Group A: Beneficiaries who are children of the disponer. This includes step-children and adopted children.
Group B: Beneficiaries who are nieces/nephews, siblings or grandchildren (or further direct-linear descendants) of the disponer.
Group C: Everyone else.
The lifetime threshold for gifts and inheritance for Group A is €335,000, Group B is €32,500 and Group C is €16,250.
To provide a rough illustration of how CAT is calculated, we will look at the below examples.
Jake inherits €550,000 from his father’s estate when his father passes away.
Given Jake is considered Group A (son/father relationship) the CAT threshold for this inheritance is €335,000.
This means €215,000 (€550,000 - €335,000) of this inheritance is taxable at 33%.
Jake pays €70,950 in Capital Acquisition Tax on this inheritance.
Jake keeps €479,050.
Sarah is gifted €10,000 by her grandmother to help Sarah buy a boat.
Sarah then inherits €40,000 from her grandmother’s estate upon her passing.
For the purposes of calculating CAT, Revenue will look at the total amount gifted/inherited by Sarah from her grandmother over the course of her life.
The total amount in this case is €50,000.
Given Sarah is considered to be in Group B (grandchild of the disponer), her CAT threshold is €32,500.
Sarah must pay 33% Capital Acquisition Tax on €17,500 which amounts to €5,775.
Sarah keeps €34,225 of the €40,000 inheritance.
As you can see from the above, the amount of tax that can be required to be paid on inheritance can be very substantial. However, there are some ways to avoid CAT and reduce the amount that is owed to Revenue upon receiving inheritance.
In Ireland, gifts under a certain amount that are made during your lifetime can be free of tax. This is known as the Small Gift Exception. Currently, the annual small gift tax exemption in Ireland is €3,000 per person. This means that you can give up to €3,000 to as many people as you like each year without them incurring gift tax.
This can be particularly helpful for people who wish to gift multiple family members money. For instance, if you have 6 grandchildren, you can gift each of them €3,000 every year and avoid them paying any CAT on €18,000 worth of gifts per annum.
If you own agricultural land or property, you may be eligible for agricultural relief. This relief can reduce the value of the property for inheritance tax purposes by 90%. Agricultural relief is available where the property being inherited in the deceased’s estate passes the “farmer test”. To pass the farmer test, the value of the land in question must make up minimum 80% of the value of the overall property on the date of the valuation.
The amount of agricultural relief depends on a number of factors which can be complex. We advise reaching out to tax experts to learn more. At FitzGerald Flynn we use the services of top tax advisers Avoca Tax Services and accountants NEXUS for our client’s needs.
Similar to the aforementioned agricultural relief, if you own a business, you may be eligible to reduce the amount of inheritance tax you must pay under business relief. If you inherit or are gifted a business, you may qualify to reduce the perceived value of the business by 90% with respect to paying inheritance tax. Business relief is available if the business is actively trading and meets certain criteria.
The beneficiary of the business must maintain control of the business for a minimum of six years after receipt in order for the relief to remain in place. If they don’t, such relief may be withdrawn.
Farms and other agricultural property that couldn’t qualify for agricultural relief may be able to avail of business relief.
The dwelling house exemption can be used if the beneficiary of the inheritance is going to live in the house that they inherit. This exemption can reduce or eliminate the inheritance tax liability on the property.
To be eligible for the dwelling house exemption, the beneficiary must have lived in the house for at least three years prior to the inheritance and cannot have an interest or share in any other house. In addition, the beneficiary must continue to live in the dwelling for a minimum of six years after receipt, however, this does not apply to individuals over 65.
In Ireland, nieces and nephews can be seen as children with regards to CAT on gifts and inheritance if they meet certain criteria and it is a gift or inheritance of business assets. This rule can only apply to one nephew/niece and they must have worked for either you or your spouse for the last 5 years. Additionally, over those 5 years, they must've worked a minimum of 15 hours/week for a small business and 24/week for all other businesses.
If the nephew/niece qualifies for this rule, they will fall under Group A in terms of Capital Acquisitions Tax and their threshold for gifts and inheritance will be €335,000.
In Ireland, a Section 72 Insurance policy refers to a type of Revenue-approved life insurance policy that is used to cover inheritance tax liability that may arise for the beneficiaries of an estate after the death of the policyholder.
A Section 72 Insurance policy is designed to help alleviate the burden of paying CAT by providing a tax-free lump sum payment to the beneficiaries of the policyholder's estate.
It's worth noting that not everyone needs a Section 72 Insurance policy and whether or not you need one will depend on your individual circumstances. If you have a substantial estate and are concerned about the potential inheritance tax liability that your beneficiaries may face after your death, it may be worth considering this type of policy. However, it's always a good idea to speak to a financial advisor to determine whether or not a Section 72 Insurance policy is right for you. Contact FitzGerald Flynn today to learn more about Section 72 insurance policies.
One of the most effective ways to avoid inheritance tax is to plan. This involves taking steps during your lifetime to minimise the amount of inheritance tax that will be payable.
It is important to seek professional advice when planning for inheritance tax. A financial planner or tax expert can help you identify the best strategies to minimise your tax liability and ensure your loved ones are retaining as much of your estate as possible.
At FitzGerald Flynn Insurances, we understand that tax planning can be complex and confusing. That's why our team of financial planners works closely with tax experts to build financial plans and strategies that ensure financial security for you and your loved ones. Contact us today to learn more about how we can help you minimise your tax liability and achieve your financial goals.
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