This is a comprehensive guide to current Irish legislation concerning financial issues after death including inheritance taxes.
Whether you are about to receive an inheritance or about to make a will, whilst good financial planning cannot lessen the sense of loss for a loved one, it can reduce associated tax bills.
This guide is brought to you by Liam Burns (ACCA), Chartered Tax Adviser who is an expert on strategies to reduce tax payable by beneficiaries. If you have any queries or want advice on this matter you can contact him here to arrange a session by phone or in person. The consultation fee starts at just €195 plus Vat which is well worthwhile in the context of where tax payable may be a significant amount.
Note: This guide is is designed to be understood by a lay person but it does cover complex areas of tax law so please feel free to get proper advice by using this enquiry form below
Table of Contents
1. INHERITANCE TAX INTRODUCTION
2. CAPITAL ACQUISITIONS TAX RATES
3. BUSINESS INHERITANCE TAX RELIEF
4. FARM INHERITANCE TAX RELIEF
5. AVOIDING CAPITAL ACQUISITION TAX (SAMPLE SCENARIO)
6. FOREIGN INHERITANCE TAX ISSUES
7. CAPITAL ACQUISITIONS PAYMENT DEADLINES
8. USING LIFE ASSURANCE TO FUND GIFT & INHERITANCE TAX
9. LIFE ASSURANCE TAX SAVINGS EXAMPLE
10. INHERITANCE TAX CALCULATOR
11. GETTING PROFESSIONAL ADVICE
INHERITANCE TAX INTRODUCTION
First and foremost, anyone who owns a property or other assets such as a life assurance policy, savings plan and even a simple deposit account should make a will.
A will not only ensures that you can distribute your wealth as you wish, but it also means that your family and beneficiaries are spared the expense and distress of a complicated and drawn-out administration of your estate as set out by the Succession Act 1965.
Dying intestate is when you die without making a will and all your property will be distributed according to the 1965 Succession Act.
Since there is no official Executor, the personal representative of the deceased, who can be a spouse, relative or friend will need to obtain what is known as a grant of Letters of Administration in order to distribute the proceeds of your estate to your beneficiaries. Below is a quick review of the main points to take under consideration when looking into this whole area.
Inheritance: Capital Acquisitions Tax
If after your death the beneficiaries of your estate receive sums in excess of the Thresholds for Capital Acquisitions Tax (CAT) purposes Inheritance Tax will be payable.
Gift Tax
A liability of gift tax arises when a person receives a benefit liable to capital acquisitions tax other than on a death.
Tax-free threshold for Capital Acquisitions Tax (CAT)
There are three tax free thresholds which apply for CAT purpose. These amounts are as follows :
1) €310,000 (since Budget 2017 to date) where the recipient is a child, or minor grandchild of the benefactor, if the parent is dead. In some cases this threshold can also apply to a parent, niece or nephew who have worked in the family business for a period of time.
2) €32,500 where the recipient is a parent, brother, sister niece, nephew or linear ancestor/descendant of the benefactor.
3) €16,250 in all other cases
CAPITAL ACQUISITIONS TAX RATES
For benefits taken on/after December 2012:
Below Threshold: Nil
Balance: 33%
Note : all benefits received since 05/12/1991 will be taking into account for the thresholds stated above.
Exemptions:
- Any inheritance or gifts made between spouses
- The first €3,000 of all gifts received from a benefactor in any calendar year
- Irish Government stock given to a non-Irish domiciled beneficiary, as long as it had been held by the beneficiary for at least 6 years previously.
- Any Inheritance received from a deceased child which had been given to the child as a gift by the parent
Dwelling House Relief:
Based on rules applicable to period prior to 25 December 2016 only (see new rules just below), if you inherit or are gifted a house and you qualify for this relief, then you do not have to pay CAT on the value of the inheritance provided that:
1) It is the principal private residence of the recipient.
2) The house must be owned by the disponer during the 3 years prior to the gift.
3) The recipient had been living in the home for the three years immediately proceeding the transfer.
4) The recipient does not have an interest in any other residential property.
Note : The tax relief will be withdrawn if the recipient disposes of the home within 6 years of the transfer. This not applicable if the recipient is over age 55.
Also an important point to note is that gifts (not inheritances) taken on or after 20 February 2007, any period during which a donee occupies a house that was during that period the disponer’s only or main residence, will not be treated as a period of occupation by the donee in the 3-year period prior to the date of the gift.
Accordingly, a parent cannot gift free of CAT the family home they share with their child unless the parent has moved out of the home at least 3 years prior to the gift, while the child remained in the occupation of it as their principal residence.
RULES/CONDITIONS (applicable from 25/12/2016)
If an individual inherits a house and you qualify for this relief, then you do not have to pay CAT on the value of the inheritance if:
- The property was the main home of the disponer (person that died)
- Beneficiary lived in property as main residence for 3 years before persons death
- Individual does not own or have interest in another dwelling house
- Individual must live in the property for 6 years after receiving inheritance
If an individual receives a gift of a house and you qualify for this relief, then you do not have to pay CAT on the value of the inheritance if:
- The beneficiary is a dependent i.e. incapacitated and unable to earn a living OR 65 years old or older at the date of gift.
- Beneficiary lived in property as main residence for 3 years
- Individual does not own or have interest in another dwelling house
- Individual must live in the property for 6 years after receiving the gift
BUSINESS INHERITANCE TAX RELIEF
Relief from CAT is available where the business property is acquired under a gift or inheritance. This relief works by reducing the value of the qualifying asset which pass under a gift or Inheritance by 90%. The qualifying business assets must have been owned by the disponer for at least 5 years in the case of a gift and at least 2 years in the case of an inheritance. Qualify business assets are as follows;
- Unquoted shares or securities of an Irish company
- Land, buildings, machinery or plant owned by the disponer but used by a company controlled by the disponer
- Quoted shares or securities of an Irish company which were owned by the disponer prior to them being quoted.
Note : This relief will be clawed back if the assets are disposed of within 6 years of the gift/inheritance.
FARM INHERITANCE TAX RELIEF
Agricultural Property (land, pasture, woodland, crops, trees, farmhouses, buildings, livestock, bloodstock and machinery, or a payment entitlement) which are passed on as part of an inheritance enjoy some additional CAT reliefs.
Instead of the land being assessed for CAT purposes at its full market value, it is assessed at 10% of its value.
Again, be aware that this relief will be disallowed if the property is disposed of within 6 years of the inheritance/gift and partly disallowed if disposed of within 6-10 years. Also to qualify the beneficiary must be a ‘farmer’. This means the persons’ total assets after receiving the gift/inheritance must consist of at least 80% agricultural property.
The ‘80%’ test does not apply in the case of agricultural property consisting of trees and underwood i.e in which case you do not have to be a farmer before you receive the gift/inheritance.
AVOIDING CAPITAL ACQUISITION TAX (SAMPLE SCENARIO)
Let’s say parents are in line to leave inheritance or intend to make a gift of €1,500,000 to a child (made up of an investment residential property (€400,000), 100,000 Shares (€600,000) and cash of €500,000.
Share cost: Father bought 50,000 @ €100,000, Worth €300,000 Bought further 50,000 of same shares @ €250,000 – worth €300,000 First in First out Applies (FIFO)
Potential Tax Liability: €1.5m less €310,000 (Child Threshold) – €3,000 (annual Exemption) @ 33% =
€391,710 CAT Due to Revenue
Note: the €3,000 annual exemption is allowable if gifted, not if inherited.
Tax Planning Solution:
(If child a qualifies for Dwelling House Relief then no CGT if transferred on death.)
Consider selling some shares (e.g. €300,000 and invest the cash (€500,000) and shares money in agricultural property – these can then be transferred at 10% of the value to child (i.e. €80,000 which the child’s threshold will be enough to cover CAT leaving Nil Tax liability).
CGT on sale of shares would apply: Tax Planning required – CGT would be higher on the first 50,000 shares. Therefore transfer 50,000 shares to wife – NO CGT on the first 50,000 shares sold – (saving €65,581) Sale of other 50,000 shares would attract CGT of (300,000 less cost 250,000 = 50,000 -1270 = 48,730 @ 33% = €16,080
Wife then leaves remaining shares in will – worth €300,000 CAT will be €300,000 less €145,000 remaining threshold of (€310K – €80K from above) = €155,000 @ 33% = €23,100 Ensure the timing of transfers are planned to avail of the condition of 80% asset for ‘farmer’ Note: Assets must be kept for 6 years and beneficiary must be resident for 3 years subsequent.
Total CAT plus CGT payable – €16,080 plus €23,100 = €39,180
Total Tax Savings: €352,530
FOREIGN INHERITANCE TAX ISSUES
If you receive an inheritance or gift from another jurisdiction there may well be a tax liability to be met in that country and here as well. Any foreign property will be taxable in cases where EITHER the disponer OR the beneficiary is resident or ordinary resident in Ireland at the relevant date.
However, you may be entitled to a tax credit on the tax paid abroad to ensure you don’t pay double tax. Please note that this credit will not exceed the Irish rate of tax payable.
Death and Capital Gains Tax (CGT)
A liability to Capital Gains tax ‘does not’ arise on death. When you inherit an asset you are treated as receiving the asset at the market value at the date of death for the purposes of CAT and CGT.
CAPITAL ACQUISTIONS PAYMENT DEADLINES
You must pay and file your CAT liability by 31st October. All gifts and inheritances with a valuation date in the 12 month period ending on the previous 31st august will have to be included in the return to be filled by 31st October. That means where the valuation date arises between the 1st January and the 31st August, the pay-and-file deadline would be the 31st October in that year. Where the valuation date arises between the 1st September and the 31st December, the pay and file deadline would be 31st October in the following year.
Example: Valuation dates
- 21st Feb 2018 – File IT38 and pay taxes by October 2018
- 6th Nov 2018 – File IT38 and pay taxes by 31 October 2019
USING LIFE ASSURANCE TO FUND GIFT & INHERITANCE TAX
Section 72 & Section 73 (formerly Section 60 & 119 Policies)
Relief was introduced by Section 60, of the 1985 Finance Act (now contained in Section 72 of Capital Acquisitions Tax Consolidation Act 2003) to allow people to plan for the payment of Inheritance Tax in an efficient way.
If a life assurance plan is put in place to provide for the tax, the Revenue will not charge Inheritance Tax on the policy proceeds if the money is used to pay Inheritance Tax arising on the death of the lives assured under the plan.
The relief is granted subject to certain Revenue conditions:
· The plan must be expressly effected under the provisions of Section 72; normally the plan is endorsed to this effect when it is issued.
· To qualify for Section 72 relief the person covered under the plan must also pay the premium.
· A joint-life plan can only be taken out by a married couple or registered civil partners
· The Policy must be a flexible/whole of life plan to be acceptable to the insurer
In essence once the insurance policy is put in force for the payment of the Inheritance tax liability (ie put in trust for the children/beneficiaries to pay the actual Inheritance tax bill) then it is acceptable to the Revenue.
The original Section 72 legislation envisaged a protection plan (term assurance, whole life type plan) being taken out to provide a cash payment on death to be used to fund inheritance tax liabilities.
Section 73 Relief – formerly known as Section 119 Relief
Section 119, of the 1991 Finance Act (now Section 73 CAT Consolidation Act) introduced a complementary relief for the proceeds of certain plans in the payment of Gift Tax. The plan proceeds in the event of a full or partial surrender would be exempt from Gift Tax when used to pay Gift Tax in connection with a lifetime gift made by the owner of the plan, within one year of the encashment of the plan.
Again certain conditions apply.The conditions are similar, but there are some differences in the conditions for Section 72 and Section 73 relief:
· The plan must be expressly effected under the provisions of Section 73; normally the plan is endorsed to this effect when it is issued.
· To qualify for Section 73 relief the person who takes out the plan must also pay the premium.
· A joint-life plan can only be taken out by a married couple or registered civil partners.
· You must continue to make regular premium payments for at least eight years.
· If you stop paying regular premiums, even after the eight-year period, you cannot restart.
· Your premium cannot increase or reduce by more than 50% in any continuous eight-year period.
· Once regular premiums have been paid for at least 8 years, any encashment from the plan after the plan has been in force for 8 years will be exempt from Gift Tax when used to pay Gift Tax within one year of making the encashment.
Section 73 is designed to allow people to use the cash value of a savings plan, or combined life and savings plan, to pay Gift Tax during their lifetime.
The main difference in the conditions for Section 73 versus Section 72 relief is that Section 72 is a life insurance policy specifically taken out to cover an Inheritance Tax liability but a Section 73 is a Savings Plan designed to pay off any Gift Tax liability that may occur in the future.
If there is a death before the eight year rule is reached then it is our belief that the proceeds of the Section 73 – Savings policy may actually be used to offset the Inheritance Tax liability.
Frequently Asked Questions (feel free to use the enquiry form below) :
Can a Section 73 plan be used to pay Inheritance Tax?
The rules state, a Section 73 plan, which does not have life cover of at least 8 x Annual Premium, will never qualify for relief in the payment of Inheritance Tax as it will not meet the Section 72 conditions.
So if the owner of a Section 73 savings plan dies before the end of the minimum 8-year period, the cash value of the plan will not qualify for relief in the payment of either Gift Tax or Inheritance Tax. Indeed if the owner died after the 8 years, and had not used the funds to pay Gift Tax before death, the value of the plan would not be exempt from Inheritance Tax.
However, it is our belief that if there is a death before the eight year rule is reached then the proceeds of the Section 73 – Savings policy may actually be used to offset the Inheritance Tax liability. This is such a ‘Grey’ area that we (as tax consultants) believe we would have a very strong case here against the Revenue.
Can a Section 72 policy be used to pay Gift Tax?
To qualify for relief under Section 72 there must be a minimum level of life cover, however if the plan also provides a surrender value, any encashment, after 8 years premiums have been paid, can qualify for relief in the payment of Gift Tax, subject to the conditions being met as previously outlined.
Should you purchase a Section 72 or a Section 73 Plan?
It depends on whether you want the plan proceeds to be capable of qualifying for relief in the payment of Gift Tax only, Inheritance Tax only or both, or whether they want the proceeds to be capable of being used to pay Gift or Inheritance Tax.
If the proceeds are required to be available for the payment of Inheritance Tax then the minimum level of life cover must be included on the plan, thereby qualifying for Section 72 relief, assuming all the other conditions are met.
If you are not concerned about Inheritance Tax, then a savings plan with no life cover can be taken out, but this will only qualify for relief in the payment of Gift Tax, again assuming all the other Section 73 conditions are met. A savings plan only might be suitable where you have already effected life cover for the payment of Inheritance Tax, or in the case of someone who simply cannot get life cover due to ill health.
We advise that your client seeks professional tax and legal advice as the information given is a guideline only and does not take into account your personal circumstances.
Finally, It’s important to note that since Capital Acquisition Tax in the form of inheritance or gift are subject to aggregation – a rolling up of benefits from various sources, the relevant thresholds can be affected.
The calculations can be very complicated and one should always consult your Financial or Tax Advisor.
Your Solicitor or Legal representative should always be consulted in relation to you making a will, Testate & Intestacy issues, the Succession Acts and Probate and also to work closely with your Financial or Tax Advisor when putting the different section policies in place to pay any outstanding liabilities.
LIFE ASSURANCE TAX SAVINGS EXAMPLE
Sally and Brian are a married couple with one son Joe, age 25, who lives at home.
They have the following asset profile :
- Family Home (Mortgage Protection in place) €253,948
- Brian’s Pension Scheme Death Benefit €203,158
- Investment Property €190,461
- Holiday Home €114,276
- Life Policy in Brian’s name, in trust for Joe €63,487
Brian dies and his estate goes to his wife, apart from the proceeds of the life policy which are paid directly to Joe. There is no obligation to make a CAT return and there is no inheritance tax liability arising on Brian’s death. Joe uses the proceeds of the life policy towards the purchase of an apartment which he moves into.
Sally dies four years later. She had kept the house, now worth €444,408 and the holiday home now worth €152,368. She invested €126,974 of the pension scheme death benefit in an apartment. On her death the apartment is now worth €203,158. She also has the other investment property which is now worth €317,435. She leaves everything to her son Joe as follows :
- Family Home €444,408
- New Apartment €203,158
- Original Investment Property €317,435
- Holiday Home €152,369
- Total Estate Value €1,117,369
Joe’s tax liability is calculated as follows :
- Taxable value of current Inheritance €1,117,369
- Taxable value of previous gift (ie life policy in trust) €63,487
- Taxable value of aggregate €1,180,856
- Group Threshold amount (€225,000)
- Taxable balance @ 33% €955,856
- Total Tax Liability €315,432
Unless his parents had put in place a ‘SECTION 72/73 policy (Life Assurance) to pay the Liability arising. Joe may have no option to sell one of the assets to meet the tax bill which is due.
INHERITANCE TAX CALCULATOR (down for maintenance temporarily – back shortly!)
GETTING PROFESSIONAL ADVICE
If you have a query about inheritance tax, you can get qualified expert advice from Liam Burns, the author of this guide. He can also advise on complex tax issues related to disbursement of probate assets among multiple family members even where there are different jurisdictions at issue. Where CGT tax is payable, there is also a service whereby that can be done on your behalf subsequent to your consultation. Just complete the quick form below and you can expect a response within one working day.