Inheritance Tax Planning
Inheritance tax planning is the process of arranging and structuring your assets and affairs to minimize the amount of inheritance tax (estate tax or death tax) that will be payable upon your eventual death. Your family may be liable for inheritance tax on your assets when you die.
If there is no inheritance plan in place, this could be a massive burden to your family or descendants down the line where they may be forced to borrow money or sell part of the inheritance you leave them to cover their tax bill.
The objective is to ensure that the maximum value of your estate is passed on to your beneficiaries, while minimizing the tax liability.
Capital Acquisitions Tax
Capital Acquisitions Tax (CAT), also know as inheritance tax or gift tax, is the tax levied on gifts and inheritances that are received by individuals in Ireland.
CAT is imposed on the beneficiary, the person who receives the gift (payable while donor is alive) or inheritance (payable after donor’s death), rather than the donor or the deceased person’s estate.
Only a spouse or civil partner inheriting from a deceased spouse or civil partner does not pay inheritance tax.
Calculating Inheritance Tax
Capital Acquisitions Tax (CAT) is calculated based on the value of the gift or inheritance received and the relationship between the beneficiary and the donor or deceased person. There are different tax-free thresholds and rates depending on the relationship. In Ireland, the current tax-free thresholds for gifts or inheritances received are as follows:
Inheritance Tax Threshold
Gifts or inheritances that exceed the tax-free thresholds below are subject to the CAT and are taxed at 33%.
- Group A: Transfers between parents and their children have a tax-free threshold of €335,000.
- Group B: Transfers between siblings, nieces, nephews, and grandchildren have a tax-free threshold of €32,500.
- Group C: Transfers between all other relationships, such as cousins, unrelated individuals, and non-linear family members, have a tax-free threshold of €16,250.
It’s important to note that CAT is a self-assessed tax, and the beneficiary is responsible for calculating and paying any tax due to Revenue. There are strict reporting and filing obligations, and it’s advisable to consult with a Financial Advisor.
How to reduce Inheritance Tax
You can plan for or reduce inheritance tax by way of creating trusts, making lifetime gifts, utilizing exemptions and reliefs, and considering other strategies such as Life Assurance policies to reduce the taxable value of the estate.
Section 72 Insurance Policy
This is a Whole of Life Insurance policy that is specifically designed to deal with inheritance tax. It works similar to regular Life Insurance where you would pay a premium on your policy and on death, in return, your beneficiaries receive a tax-free lump sum. In this case, the proceeds are used to cover the tax bill and Revenue will not charge CAT on the proceeds in the money is set to pay for the Inheritance Tax.
To qualify for Section 72 cover, below are some of the of the main criteria:
- The person who owns the plan must pay the premium.
- A joint-life plan can only be taken out by a married couple or registered civil partners.
- The plan holder must continue to pay the premiums of the policy for at least eight years.
There is also a Section 73 Savings Policy, where the proceeds again are used to reduce or pay off any inheritance tax liability
Small Gift Exemption
You could make use of the annual gift exemption which is currently €3,000. A parent can give a son or daughter €3,000 a year, and there’s no tax to be paid on it. The €3,000 can be given by both parents, thus allowing for a €6,000 gift per annum.
Dwelling House Exemption
This is a means to inherit a house without actually having to pay any inheritance tax (CAT). There are conditions to qualify for this exemption and be exempt from inheritance tax completely. To qualify, the following must be met:
- The house was the only or main home of the person who died (this condition does not apply if you are a dependent relative).
- You lived in the house for three years before the person’s death.
- You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.
- The house continues to be your main or only home for six years after the date of inheritance. This does not apply if you are over the age of 65.
What assets are liable to Inheritance or Gift Tax
In Ireland, the main assets that are subject to inheritance or gift tax are:
- Cash: This includes money held in bank accounts, savings, or investments.
- Property: Family home (exempt in certain cases), second home, or investment property/real estate.
- Investments: Stocks, shares, bonds, etc.
- Valuables: Assets like jewelry, art, antiques, and collectibles.
- Business interests: Ownership stakes in businesses or partnerships.
- Life insurance policies: Proceeds from life insurance policies may be subject to tax if they exceed certain thresholds.
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