Smaller family sizes and increasing property values have created a situation where a liability for inheritance tax (also known as Capital Acquisitions Tax) is not just for the children of wealthy parents. However, smart estate planning can reduce your children’s tax liability and, in many cases fund it by putting an appropriate life policy in place.
What is Capital Acquisitions Tax?
Capital Acquisitions Tax (CAT) is a tax paid by the beneficiaries of inheritances or gifts once the value of such inheritances or gifts exceed certain lifetime thresholds. It can also be called Inheritance or Gift Tax.
What is the current rate of Tax?
The current rate of tax is 33% and this amount applies for sums that exceed the relevant lifetime thresholds.
What are the Thresholds?
The current thresholds are;
|Child, Minor Child, or Parent of the Disponer*||€310,000|
|Parent, Brother, Sister, Niece, Nephew, grandparent, grandchild, lineal ancestor or descendent of the Disponer*||€ 32,500|
|All Other Cases||€ 16,250|
- Disponer means the person providing the gift or inheritance
How are these Thresholds applied?
Ideally, everyone with assets such as property or investments or even life assurance policies should make a will. A will is a legal document which sets out how a person’s assets should be distributed on their death. The definition of each beneficiary’s relationship with the disponer will define which threshold, if any, will apply.
What happens if I die and I don’t have a Will?
Unfortunately, the dispersal of your assets will then be decided by the application of the 1965 Succession Act, which may not be in accordance with your own intentions. It is also worth pointing out that if you die without making a will (intestate), it takes significantly longer to process the dispersal of your assets.
If you have family members who are financially dependent on you, this is hardly an ideal scenario and should in itself encourage you to make a will.
My husband/wife will receive everything if I die. What tax will be due?
Nothing. Transfers of assets between spouses, or civil partners, create no gift or inheritance tax liability for the person receiving the assets.
I’m not married, but have been living with my partner for many years, what tax treatment will apply if either of us dies?
On the face of it, despite you having been in a relationship for a long time, you will still be treated as “strangers” in the eyes of the legislation and suffer the lowest threshold of €16,250 and potentially a significant tax liability in the event of either of you dying.
What does Lifetime mean?
Lifetime actually applies to all gifts and inheritances received by the individual since 5th December 1991 under each category.
What if my parents live abroad or have foreign assets which may form part of my inheritance?
Revenue states that if you or the person leaving you the foreign asset are tax resident in Ireland, then a liability to Capital Acquisitions Tax may apply. It is possible that taxes paid on the asset in the other jurisdiction may be offset against Irish taxes due.
Is it true that a Life assurance policy can be arranged to cover or reduce the tax liability?
Yes, the disponers can put a life policy in place which will pay out on their death and the proceeds can be used to pay some or all of the tax liabilities for the beneficiaries.
How does Life assurance work?
If you are under 75 years of age, you can take out a whole of life policy which is written in trust under Section 72 Capital Acquisitions Tax Consolidation Act 2003. In the event of your death, the life policy is not included in the calculations for the estate and can be used to pay or part pay your beneficiaries’ inheritance tax liabilities.
In many cases, married couples will leave the majority of their assets to each other and then on the death of the surviving spouse, divide their assets amongst their children or wider family. In that scenario, the life policy will be arranged on a joint life, second death basis, with the proceeds not payable until the surviving spouse passes away.
Please note that if the sum assured on the date of death exceeds the tax liability of your estate, the surplus amount becomes part of the estate and will be subjected to inheritance tax.
There are a few exemptions from Capital Acquisitions Tax:
- The first €3,000 in gifts received from a benefactor in a calendar year is tax free
- Any inheritance received by a parent from a deceased child which had been previously gifted by the parent to the child is tax free
- Dwelling House Relief – a child may inherit a house free from Capital Acquisitions Tax subject to certain conditions. In addition, a child may, in certain circumstances, receive a tax-free gift of a house, subject to certain conditions.
- Business Relief – the value of business assets can be reduced by 90% for inheritance tax purposes, subject to certain conditions
- Agricultural Relief – again the value of agricultural property can be reduced by 90% for inheritance tax purposes, subject to certain conditions
- Approved Retirement Funds (ARFs) may be treated differently in certain circumstances which will reduce the potential tax liability for the beneficiaries
Estate planning is a specialised area and your MoneyCoach consultant will engage with your solicitor and/or accountant to ensure that the appropriate measures have been taken to minimise the tax liability on the entire estate.
If you have further questions, why not contact one of our advisors for an initial consultation. You can use the Quick Enquiry button, Live Chat or call us on 1890 428 343