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Blog Homepage > The Importance of Inheritance Planning

11/12/15

Ireland has one of the highest inheritance tax in the world. Changes in Inheritance Tax rules commenced in 2009 but it is only now that people are starting to realise the impact this is having as property prices and asset values begin to recover.

The tax bill suffered by beneficiaries can be substantial, depending on 3 main factors:

  • The relationship between the deceased and the beneficiary (this determines the maximum tax-free threshold that applies, i.e. the ‘Group Threshold’)
  • The net/taxable value of the inheritance
  • Any previous gifts or inheritance received.

What many people don’t realise is payment of this tax bill needs to be paid soon after the inheritance. The onus is on the beneficiary to pay it and complete a full tax return. If you do not plan ahead, your family could lose part of their inheritance or be faced with a difficult decision between having to sell part of their inheritance, or borrow the money to pay the tax bill.

If your family is likely to have to pay inheritance tax when you die, it may be a good idea to protect them against this beforehand.

What are the thresholds and CAT tax rate?

Inheritances can be received free from Capital Acquisitions Tax (CAT) up to a certain amount. The tax-free amount varies depending on your relationship to the person giving the gift (group threshold).

There are three different groups. Each group has a threshold that applies to the total value of the inheritances you’ve received, in that group. The current rate of Capital Acquisition Tax is 33%.

Capital Acquisitions Tax Group Thresholds after 14th October 2015

GroupBeneficiaryTax free amount*
ASon or daughter€280,000
B

A parent*, brother, sister, niece, nephew or grandchild  of the person giving the gift

** In certain circumstances a parent taking an inheritance from a child can qualify for Group A threshold.

€30,150
CAll other relationships, other than those mentioned in A or B€15,075

*CAT only applies to amounts over the relevant group threshold.

Example of how Inheritance tax works

Net/Taxable Value of Inheritance€700,000 
Number and Type of Beneficiaries:2(son and daughter)
Breakdown of Inheritance DueJamieDeirdre
 

Gross Inheritance to each Beneficiary

€400,000€300,000
 

Less tax free amount threshold

Relationship: Child i.e. Group A

€280,000€280,000
Gross Taxable Inheritance per Child€120,000€20,000
Less Personal Capital Gains Tax Exemption€1,270€1,270
Net Taxable Inheritance per Child€118,730€18,730
Tax payable at 33% per Child€39,181€6,181

Overall Inheritance Tax Due - €45,362
  

 

What are your options to protect your family against Inheritance Tax?

 

The tax liability for beneficiaries can be avoided in a number of ways:

1. By effecting a ‘Section 72 Life Assurance Policy’

This policy funds the Capital Acquisitions Tax (CAT) liability which arises on the benefits inherited from your estate and the proceeds of this are exempt from inheritance tax. This policy is relatively straight-forward to set up, however is subject to medical underwriting and therefore the earlier this is done, the better.

2. By gifting a maximum of €3,000 per person annually

Your beneficiaries can each get gifts of up to €3,000 a year from you without paying tax. This exemption, which is known as the small gift exemption, is useful if you can afford to drip-feed your inheritance while you are still alive.

3. By gifting of the family home to a child

You could save your children hundreds of thousands of euro in tax by encouraging them to move into any second homes or investment properties you intend to leave to them

Please note: Different guidelines apply for those passing on a business or farm to a child, which one should seek professional advice for.

 

Cornmarket is here to help and Inheritance Planning is about to get a whole lot easier! For information on our Inheritance Planning Service call (01) 420 0993.