In order to pass your assets or wealth on to the next generation effectively, it is vital that you ensure proper estate and gift tax planning is put in place. With careful estate and tax planning, it is possible to minimize or even eliminate the amount of tax payable on the transfer of your assets to your loved ones.
Inheritance tax planning can often be fraught with concerns and challenges and is one that many clients often struggle with. When you die, you may want your estate and assets to pass to your children or other loved ones, however the potential risk that a significant percentage of the estate may be subject to inheritance tax may reduce the amount that goes to those you intended and increases the amount that goes to the Revenue Commissioners. Many clients would prefer not to see a significant portion of their assets go to the Revenue Commissioners and with a proper estate plan in place, we can assist you in this regard.
Estate and Gift Tax Planning – Capital Acquisitions Tax
There are three tax thresholds that apply for Capital Acquisitions Tax (CAT) purposes.
- €335,000 where the beneficiary is a child, minor grandchild of the benefactor (if the parent is deceased), or parent.
- €32,500 where the beneficiary is brother, sister, niece, nephew or lineal ancestor/descendant.
- €16,250 in all other cases, also known as strangers in blood.
These tax thresholds apply to the transfer of assets by way of a gift in the lifetime of the donor (person giving the gift) or by way of inheritance to a beneficiary on the death of the donor. Once the value of the gift or inheritance exceeds the designated tax threshold amount applied to that individual, CAT is payable on the balance at a rate of 33%.
By ensuring a proper estate and tax plan is put in place, you can mitigate a substantial amount of the tax liability for your beneficiaries.
The well-known exemption called the ‘small gift exemption’ allows you to transfer the sum of €3,000 to another individual in any calendar year without paying Capital Acquisitions Tax. These gifts are also exempt from the lifetime CAT threshold amount. Parents therefore can transfer €3,000 to each child each year. Whilst this might not seem like a lot, it can add up over a lifetime and can substantially reduce a Capital Acquisitions Tax bill considerably.
A Section 72 insurance policy can also be used as an effective way to generate sufficient cash which your beneficiaries could get tax free and can be designated to pay the Capital Acquisitions Tax bill. This is a life assurance policy. The proceeds of the policy are tax free if they are used to settle an inheritance tax bill. The proceeds of the policy would not count towards your overall estate and can be used by your beneficiaries to discharge the Capital Acquisitions Tax, instead of them having to use your hard earned life savings to pay the Revenue.
There are a number of other CAT reliefs which may be applicable to your beneficiaries depending on the nature and type of assets you wish to bequeath to your loved one.
What Other Reliefs Are Available When it Comes to Estate And Gift Tax Planning?
Tax Planning – Dwelling House Relief
This relief allows for a full exemption from Capital Acquisitions Tax where you gift or bequeath (leave in your Will) a dwelling house to your loved on, provided they meet a number of qualifications for this relief;
- The home must be owned by you (the disponer) during the three years prior to your death.
- It must be the principle private place of residence for your beneficiary. In other words, the person inheriting the property needs to have been living in the property for three years prior to the homeowner’s death.
- The person inheriting the home must also remain in the house for six years after they inherit the house.
- The beneficiary inheriting the dwelling house must not own or have any interest in any other residential property.
Tax Planning – Business Relief
A relief from Capital Acquisitions Tax is available where the business property is acquired under a gift or inheritance. This relief operates by reducing the value of the qualifying assets which pass under the gift or inheritance by as much as 90%. The qualifying business assets must have been owned by the disponer by at least five years in the case of a gift or two years in the case of an inheritance.
In addition, the beneficiary of the gift or inheritance must retain the business for a period of six years and must ensure that the business is run in such a way that it still qualifies for the relief during this period, otherwise they will fall foul of the claw-back provisions.
Tax Planning – Agriculture Relief/Farm Inheritance Relief
A beneficiary receiving agricultural property as a gift or inheritance may enjoy the additional benefit of a Capital Acquisitions Tax relief. This relief provides for a 90% reduction on CAT where they meet the requirements of the ‘farmer’ test. This means that the beneficiary’s total assets after receiving the gift or inheritance of agricultural property must consist of at least 80% agricultural property, therefore where a beneficiary’s assets consist of mainly 80% or more of agricultural property, they will be classed as a farmer and eligible for this relief from CAT.
The beneficiary must also remain an Irish resident for the proceeding three years in order to be eligible for this relief.
This 80% farmer test does not apply in the case of agricultural property that consists of woodlands.
As always, there is a claw-back provision and the relief will be disallowed if the property is disposed of within six years from the date of the inheritance or gift.
Gift Tax Planning – Taxation of Spouses
There is no Capital Acquisitions Tax between spouses, therefore any gift or inheritance left to your spouse is completely exempt from CAT. This exemption only applies for legal spouses and registered civil partners.
Co-habitees are treated as strangers in blood for inheritance purposes and attract the lowest CAT threshold amount in the sum of €16,250.
The basic goal of estate and gift tax planning is to ensure that as much of your assets and property, whether they are gifted during your lifetime or bequeathed in your Will, are transferred with as little taxation consequences as possible and by having a proper estate plan put in place, we will ensure this.