Plan that Inheritance!

Changes in taxation often go under the radar and the impact goes unnoticed. In this article we wish to highlight the financial considerations when transferring assets, either by Gift or Inheritance.

 

Most people will be aware that there is a tax free threshold, whereby the amount transferred will not be subject to gift tax or inheritance tax. This threshold depends on the relationship between the person making the gift/inheritance (the Disponer) and the person receiving it (the Beneficiary). This threshold is subject to change and has been reduced since its peak in 2009. In addition the Tax rate that applies to any excess over the threshold has increased, see chart below:

 

Capital Acquisitions Tax
Relationship	Threshold in 2009	Tax Rate in 2009	Threshold in 2018	Tax Rate in 2018
Spouse	No limit		No Limit
Child	Limit €542,544	25%	Limit €310,000	33%
Brother, sister, nephew etc	Limit €54,254	25%	Limit €32,500	33%
Others	Limit €27,127	25%	Limit €16,250	33%

 

Unmarried Couples

Many people are choosing to live together in non-married relationships. In addition, there are now over 220,000 separated or divorced people living in Ireland (Census 2016). It is possible these couples will fall into the ‘Other’ category above and will only have an exemption of €16,250 when transferring assets either by gift or inheritance. This can create a sizeable tax burden and advance planning is essential.

 

Family Home

Prior to December 2016 it was possible, subject to certain conditions, to gift a dwelling house to a child without having to pay any capital acquisitions tax (CAT). However the Finance Act 2016 has removed this facility for most people. This can create an unforeseen tax burden.

 

Business Relief and Agricultural Relief

There are still valuable reliefs for the transfer of qualifying business or agricultural assets. There are many terms and conditions attaching that are beyond the scope of this article, advance planning for these events is essential.

 

How to plan for Capital Acquisitions Tax

Annual Exemption

There is still an annual exemption of €3,000 per annum. This means any individual can gift €3,000 to another without any tax implication. It is possible to set up a regular savings plan to accumulate funds over a period of time.

 

Using Savings to pay Gift Tax

It is possible to start a regular savings plan, known as a Section 73 plan, and use the proceeds to pay gift tax. If this is done correctly, then the savings do not form part of the gift for tax purposes. This is best illustrated by an example, assume the tax free threshold has already been used up and parents want to transfer assets to the value of €399,000 to a child:

	No Savings Policy	With Savings Policy
Gift Savings Policy Total Gift   Tax at 33%   Net Gift received	€399,000             Nil €399,000   €131,670   €267,330	€300,000 €   99,000 €399,000   €   99,000   €300,000

In the above example, using the Section 73 Policy can reduce the tax

payable on a gift of €399,000 by €32,670.

 

Using Life Assurance to pay Inheritance Tax

It is possible to set up a life assurance policy specifically designed to pay inheritance tax, known as a Section 72 policy. As long as the policy proceeds are used to pay the tax, they do not form part of the taxable estate. See example below, again we assume the threshold has already been used up:

	No Life Policy	With Life Policy
Inheritance Life Assurance Policy   Tax at 33% Life Assurance Policy Net Inheritance	€1,000,000 Nil   €330,000             Nil €670,000	€1,000,000 €   330,000   €   330,000 €   330,000 €1,000,000

In the above example, the life assurance policy pays all of the Inheritance

Tax and the life policy proceeds are not taxable.

 

As you can see, some advance planning is essential to avoid paying too much tax on asset transfers. This is a complex area, and we work with Tax and Legal experts to plan for such events.

 

If you would like a consultation about your financial plans, please call Harry Crummy on (0402)32629.

 

Harry Crummy is a Certified Financial Planner™ and a Qualified Financial Advisor and is a principal at Efficient Financial. See www.efficientfinancial.ie for more details.