Planning For The Future: Inheritance Tax

Inheritance tax is oftentimes something that’s forgotten about until it’s too late. Back in 2018, Revenue collected some €466.3 million from inheritance tax payments in Ireland – a bill that can come as quite a shock amidst a bereavement.

Thinking ahead and preparing for inheritance tax is the key – so let’s assess what’s needed:

Capital Acquisition Tax (CAT) is a tax on gifts and inheritances. You may receive gifts and inheritances up to a set value over your lifetime before having to pay CAT. Once due, it is charged at the current rate of 33%. The tax is payable by the beneficiary of the gift or inheritance and all benefits received since 5^th December 1991 are aggregated to calculate the tax.

The relationship between the disponer (the person giving the gift or the inheritance)  and the beneficiary (the person receiving it) is central to assessing the CAT liability. This is because, depending on that relationship, a certain level of benefits may pass from the disponer to the beneficiary before a liability to CAT will arise. This non-taxable level is known as a Group Threshold.  

• Group Threshold A generally applies only to gifts or inheritances taken by a child from a parent (or to a minor grandchild where the child is deceased). This threshold is currently €335,000.
• Group Threshold B applies where the person receiving the gift or inheritance has a family relationship with the person giving it (e.g. brother, sister, nephew, niece, grandparent, grandchild). The Group B Threshold is currently €32,500.
• Group Threshold C applies to all other gifts or inheritances and the threshold is currently €16,250.

Example;

Áine’s parents gave her €80,000 as a deposit for a house. When her parents died, she received an inheritance from their estate of €300,000. For Capital Acquisitions Tax (CAT) the total amount to declare is €380,000. 

Using the basic Revenue guide, Áine has a CAT threshold of €335,000. She will, therefore, have to pay CAT on the extra €45,000. 

CAT, at a rate of 33%, would apply to any benefits received in excess of the above thresholds. The person who is receiving the gift or inheritance is responsible for paying any Capital Acquisitions Tax (CAT) that is required.

You can pay Capital Acquisitions Tax (CAT) online here or by filling in Form IT38.

Reliefs and exemptions:

There are some reliefs and exemptions when it comes to CAT liability:

CAT will apply to the entire estate which would be the family home. However, the dwelling house exemption may be available. The beneficiary won’t have to pay CAT on the dwelling house if:

• The house is the only or main residence of the person who died
• it was occupied by a beneficiary as his or her only or main residence for the 3 years preceding the date of the inheritance.
• it is the only dwelling house in which a beneficiary has a beneficial interest at the date of the inheritance
• the beneficiary must continue to occupy the dwelling-house (or its replacement, if sold) as his only or main residence throughout the period of six years commencing on the date of the inheritance
• If you are a dependent relative, the exemption also applies to a gift of a dwelling house, where you satisfy certain conditions.

What do you not pay CAT on?

You do not pay CAT on a gift or an inheritance if either:

• It is given to you by your spouse or civil partner
• The total is below that group threshold amount (when its value is added to previous gifts and inheritances in the same group).

You do not pay CAT on a gift with a value of €3,000 or less from any one person in any one calendar year.

Also…

• You can receive a tax-free gift of up to €3,000 each year from anybody – this is known as the small gift exemption. This can be a good idea for parents. For example, a couple could give their daughter and her family up to €30,000 every year if she has three children (€3,000 from each parent for the daughter, the son-in-law and three children).
• Business and Agricultural Relief operates by reducing the market value of ‘agricultural or business property’ by 90%. Thus, this substantially reduces the amount that is subject to CAT.
• Take out a section 72 policy. There are insurance policies you can take out that will cover the CAT tax bill that might apply. The pay-out on a Section 72 policy is tax-free if you use it to pay an inheritance tax liability. These policies can be quite expensive but may prove useful when the cost is considered against the potential tax leakage which may arise on the transfer of assets on death.

Other considerations to include:

• Consider the merits of passing assets by way of gift now as opposed to bequeathing wealth by way of a Will. Lifetime transfer will generally have capital gains tax, capital acquisitions tax and stamp duty implications. 
• Transfers on a death do not incur stamp duty and capital gains tax –– therefore, a lifetime transfer can potentially give rise to a significantly higher tax burden than a transfer on death. However, it may be worthwhile considering when a significant appreciation in asset value is anticipated.
• By including children in the purchase of investments, this will ensure that the growth in the asset value accumulates to the child and thereby reduces the value of their future inheritance.

Important dates:

If the valuation date falls between:

• 1 January and 31 August, you must pay by 31 October of that year
• 1 September and 31 December, you must pay by 31 October of the following year.

You can pay your CAT online, with a debit card, or by Electronic Funds Transfer.

Now the important bit: you do not want to file your CAT returns late.

If you receive a gift and/or inheritance, you may have to file a return. The charge for the late filing of a return is a percentage of the total tax due for that year, and will depend on the length of the delay. So, the later you are = the amount you’ll have to pay. 

There is, however, an overall cap on the amount you have to pay. If you file the return within two months of the filing date, 5% will be added (up to a maximum of €12,695). After that time 10% will be added (up to a maximum of €63,485).

You may also have to pay the following daily interest rates for late payments:

The following daily interest rates apply for late payments in relation to agricultural or business property:

Why Get Financial Advice?

We know taxes like the back of our hand, and with extensive experience and technical knowledge, we can help to ensure your tax obligations are met, while identifying any opportunities to minimise exposure. If you’re looking for advice from some of the very best accountants in Ireland, we’re here to help. No two cases are the same, and we like to focus on getting to know our clients, so that we can tailor our tax services to meet your specific needs. Contact Mary in our tax department today.

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