Benjamin Franklin once famously commented “There is nothing in this world that’s more certain than Death and Taxes”. This is as true today as it was then, but still, we’re amazingly blasé when it comes to planning for either. It’s not as if the tax rate is an incidental amount either? Capital Acquisition Tax in Ireland is imposed at a whopping 33%. This is the seventh highest amongst countries that are members of the (OECD). (Source, Family Business Coalition 2015).
But what exactly is this Capital Acquisition Tax (CAT) you may well ask? Well, it’s a tax levied by the Revenue Commissioners on the recipients of Gifts received (Gift Tax) and Inheritances acquired (Inheritance Tax). For simplicity purposes, this blog will provide an overview of CAT from an inheritance tax perspective. That is by far the much bigger issue for our clients. There is no inheritance tax liability between a Husband & Wife or amongst Civil Partners. Co-habiting Couples are not so lucky as mentioned in a previous blog and treated as strangers. Thereafter, everyone is fair game. The tax rate levied is the same punitive 33% for everyone. There are certain exemption thresholds, depending on your relationship to the disponer, as follows:
These threshold amounts are
Group Category: Group A Group B Group C
Relationship Son or Daughter Parent, Sibling, Everyone Else
to Disponer: Niece/Nephew,
Threshold Amount: €335,000 €32,500 €16,250
These thresholds amounts are the aggregate lifetime limits on all gifts and inheritances received since 5th December 1991.
So, now that’s sorted, let’s look at an example of a married couple, two children with some rental properties and other assets valued in total, at say €1,800,000. Dublin people will be well used to such valuations but even amongst mid to higher net worth couples in the rest of the country; such values are not out of place. On death of the 2nd parent, each child will receive their half share, or €900,000 each. As they fall into Group A, the 1st €335,000 is exempt but the balance of €565,000 is taxed at 33% meaning each child has a tax liability of €186,450.
So, to cut to the chase, this couple has paid taxes all their lives on everything they ever earned (PAYE, PRSI, USC). On everything they ever bought (VAT, Excise & Stamp Duty). On anything they ever sold (CGT). Oh, did I forget to mention all the other indirect taxes, fees and charges along the way? But, on death, they’re passing (excuse the pun), possibly the biggest tax liability of all to their two children. Perhaps, these kids have conveniently got this money saved up in some piggy bank. If not, then they’re going to have to either sell some of the inherited assets (if they can), or take on another mortgage.
By the way, apart from coping with the emotional stress of grieving a dead parent, this tax bill falls due to be paid within a very short period of time.
With a little advance planning, inheritance tax can, as with most things be prepared for. First off, there are some reliefs you should be aware of. The most significant of these being the Farm & Business Asset Relief. This can reduce the valuation of these assets by up to 90%. Others, like the Dwelling House Relief and the Favourite Niece/Nephew Relief may also be realisable. To qualify for any of these however, certain conditions need to be met.
Aside from looking at the reliefs, here at Lifestyle Financial Planners, we take people on a journey incorporating the use of innovative life-time cash flows. It’s like being placed in a “Time Machine” where we give you a clear view of what your financial future looks like. If you don’t like what you see, we bring you back in time, and hey presto, you can do something about it. Now that’s real Financial Planning, I’d say!!! So, rather than leaving a large estate and possible inheritance tax issues, we sometimes encourage people to Spend, that’s right, Spend. You’ve worked hard for what you’ve got, if there are things you’d like to do, we do the math’s and give you the freedom to do just that, without guilt.
That said, there’s only so much spending one can do though, so next, we would next encourage you to Gift, that’s right, Gift. A very useful but little known gem of a tax saving idea is to make use of the Annual Gift Tax Exemption. Here, each parent can gift each child €3,000 per year (that’s €3,000 per child from each parent) every year. You must avail of this exemption each year though, so remember, if you don’t use it, you lose it. For those with married children, each parent can also gift €3,000 to their son/daughter in law. If you fear that’s stretching it a little, then you can bypass and gift your grandkids instead.
If you’re going to leave behind a hefty inheritance tax liability, then the Revenue Commissioners will allow you set up a Section 72 life policy to offset this. This S72 pays out a lump sum on death, in this case €372,900 so in effect the policy proceeds pay your kids inheritance tax liability. Ordinarily, claims from life assurance plans form part of your estate, and they wouldn’t work here.
This topic on inheritance tax, as with all other advices and information I share with you should not be viewed in isolation. See how financial planning has helped clients in some of our Case Studies which you can find on our website www.lifestylefinancialplanners.ie
Please share this blogpost if you think it has been informative. If you wish to get more detail on the reliefs, or have any other queries on this subject, please email email@example.com.
As always, contact me if you have any other personal Financial Planning queries, or would like to arrange your free Discovery Meeting consultation.
Paul is the Managing Director of Lifestyle Financial Planners Ltd and been in the Financial Planning business since 1985. Lifestyle Financial Planners offer specialist, tax-efficient wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner and holds a Masters Degree from UCD in Financial Services and Risk Management.
Tel: 096-75951 Mob; 086-8053755, www.lifestylefinancialplanners.ie
The information contained in this article is for general information only. It cannot be relied upon as the basis for any form of agreement or advice. We advise readers seek professional tax and legal advice where necessary. The information given is a guideline only and does not take into account your own particular circumstances.
Lifestyle Financial Planners Ltd trading as Lifestyle Financial Planners is regulated by the Central Bank of Ireland.