Ireland has one of the world's highest rates of Capital Acquisitions Tax (CAT) in the world. However, there are a number of things you can do to reduce this tax bill.
1. A ‘Section 72 Life Assurance Policy’
This is a life insurance policy which will help you to protect your family against having to pay inheritance tax. This plan will provide a cash payment when you die which your family can use to pay any tax bill that might result.
The proceeds of this life insurance policy are exempt from inheritance tax – however it must be used to pay the inheritance tax bills that arise at that time.
This policy is relatively straight-forward to set up, however it is subject to medical underwriting. Like all life insurance policies, it depends on your age, health, whether you smoke and the amount of cover required. It’s underwritten in the same way as a normal life insurance policy.
Example of how it works
On your death, your daughter inherits a house worth €550,000 and other assets worth €50,000. This results in an inheritance tax bill of €95,700.
If your daughter does not have access to €95,700 she will have to sell the family home to pay the tax bill. You can avoid this scenario with a Section 72 Life Assurance Policy.
If you take out a Section 72 Life Assurance Policy for €95,700, on your death your daughter would get your home and the other assets while the Revenue would get the proceeds of your Section 72 Life Assurance Policy to pay the inheritance tax bill.
2. Gifting a maximum of €3,000 per person annually.
Another useful and efficient tool in terms of tax planning is the Small Gifts Exemption. You may receive a gift of up to the value of €3,000 from any person in any calendar year without having to pay Capital Acquisitions Tax (CAT).
In simple terms, this means that a parent can gift €3,000 each year to a child (both parents can gift €6,000). In fact, the gift can be given to anyone – a grandchild, niece, nephew or even a total stranger! It may be successfully used to reduce the overall estate and therefore reducing or eliminating any potential inheritance tax!
3. Gifting the family home to a child
The Finance Act 2016 introduced changes to the qualifications which apply to inheritances on or after 25th December 2016. You will be exempt from CAT on a house you inherit if you -
- Are a dependent relative of the person making the gift because you are.
- Permanently and totally incapacitated due to a physical or intellectual disability and you are unable to earn a living.
- 65 years or older at the date of the gift.
- The house was the only or main home of the person who died.
- You lived in the house as your main home for the 3 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 is your main home for 6 years after you receive the inheritance. This does not apply if you are over age 65. This is correct as of September 2018.