Probate Senior Times
Be Tax Sensible with your Estate.
Regular readers of Senior Times will be familiar with previous articles highlighting the very significant tax problem that has arisen in circumstances where people leave money or assets to their children when they die.
The problem has arisen for two reasons. Firstly, the amount a child can take tax free from a parent has been reduced by the Government from €540,000 to €280,000 since 2009. Secondly, the rate of tax has increased from 20% to 33% over the same timeframe, which represents a very significant 65% increase in the tax charge.
Therefore where a child could inherit €540,000 without any tax liability in 2009, the same inheritance today would trigger a tax liability of €85,000.
The effect is that an Estate with a reasonably modest Dublin property can trigger heavy tax liabilities.
So, what is Capital Acquisitions tax, and can it be managed.
Capital Acquisitions Tax
Capital Acquisitions Tax (CAT, gift tax) is a tax on gifts or inheritances. In broad terms, a CAT liability will arise where either the person leaving the asset, or the person receiving the asset are living in Ireland. If neither live in Ireland a liability will still arise if the gift or inheritance comprises of Irish assets. Where a liability arises, the person who receives the gift or inheritance is liable to pay the tax.
The present tax rate for CAT is 33% in respect of gifts or inheritance (March 2016). There is a lifetime threshold amount that an individual can be gifted or can inherit tax free. The level of the threshold is determined by the relationship between the person making the gift or inheritance and the person receiving the gift or inheritance.
The tax free threshold amounts are presently as follows
Relationship between parties Group Threshold (March 2016)
A. Son/Daughter : €280,000
B. Parent/Brother/Sister/Niece/Nephew/Grandchild : €30,150
C. Relationship other than Group A or B : €15,075
For example, you and your spouse can gift €280,000 to a child free of gift tax. When determining if the life time tax free amount has been reached it is only gifts or inheritances that are taken from 5 December 1991 which are relevant.
Therefore, if your adult child is likely to inherit assets worth more than €280,000, a tax liability is to be expected.
A question arises around whether it may be possible to reduce that liability.
When politicians defend this onerous tax charge they do so by pointing out that there is a relief from CAT on the inheritance of a house, which reduces the possibility of someone being charged CAT. Therefore it is worth looking at this relief to see what it entails.
Private Residence Exemption
Tax legislation provides a relief from CAT for the transfer of a private residence, where the recipient has resided in that property for the previous three years, and the recipient did not have a beneficial entitlement to a property prior to the transfer. The value of the property is not taken into account when calculating the tax free threshold for future gifts or inheritances. Therefore a parent could gift a house to a child, without reducing the tax free amount that the child can be gifted or inherit in the future, provided the conditions of the relief are met.
As with most tax exemption, there are rather precise conditions attaching to the reliefs that must be met, otherwise the relief will not be available. For example, this relief provides that in the child meeting the three year residence requirement, any period where both parent and child occupy the house at the same time as their main residence, cannot be taken into account by the child. To confuse it further, this restriction can be overcome if the parent is dependent on the child due to old age or infirmity.
Also if the child is not living with the parent, but is living in their own property, they will not be entitled to the relief. But even if they moved in to care for their parent, and did so for three years, they still would not get the relief because they own a property already. While the obvious solution maybe to sell the property, this may not be feasible if in negative equity.
So while Politicians may highlight that there are relief’s available, readers need to be very careful to make sure they get good advice to ensure that the relief applies in their case.
If a child is going to suffer a tax liability on assets they inherit, thought should be given to reducing the amount the child inherits, by leaving some of the assets to the child’s child, (grandchild) instead.
For example if an adult child was to inherit €370,000, CAT would arise on €90,000, giving rise to a liability of €30,000. However, if that child had three children, it would be sensible to leave each of those children €30,000 and reduce the adult child’s inheritance by the same amount. Those children are grandchildren of the person providing the inheritance, and they can take an inheritance under the Class B threshold. This means that they can take the full amount of €30,000 each tax free.
The adult child’s inheritance will reduce by €90,000 saving €30,000 in CAT. Professional Will drafting can achieve that.
Indeed a further €15,075 could be transferred to your child’s husband or wife, if appropriate.
Small Gifts Exemption
An individual can receive gifts of €3,000 per calendar year free of gift tax from any person. The gift is ignored for tax purposes and is not taken into account in reducing the threshold amount received. On the face of it, €3,000 does not sound like a lot, but when considered it more detail it can be useful.
In the example above there are four individuals. They could each take €3,000 from a Grandparent, and if both Grandparents are alive, they could each receive €6,000 without any tax being charged. This means that grandparents could transfer €24,000 to a family of four without there being any tax liabilities. Moreover if they do it each year after only four years they will have transferred almost €100,000 without incurring tax.
The tax system operates on a self-assessed basis. This means that if you receive a gift or inheritance you are obliged to tell the Revenue about it. A person who receives a gift or inheritance is required to submit an inheritance tax return to Revenue when the value of the gift or the inheritance is 80% or more of the tax-free threshold. The return must be filed and the tax liability paid by the 31st October where the valuation date lies in the twelve months prior to the 31st August before the deadline.
The Revenue Commissioners can apply surcharges and penalties where you don’t file a tax return or file it late.
Tax Efficient Wills
It is good practice to review or re-draft your Will every few years, as your circumstances change. Also as tax law changes over time and asset values increase or decrease, then your current Will may not be as tax efficient as when initially drafted.
You should consider subjecting your Will to a Tax test to establish the likely liabilities that will arise on foot of its provisions. This will put you in a position to consider whether there is any scope to reduce those exposures.
All commercial decisions have a legal and tax consequence, and professional advice should be sought to ensure that you meet your legal obligations while simultaneously minimising your tax exposure.
As Solicitors, Chartered Tax Advisers and Trust and Estate Practitioners, we have all the skills you need at Probate Professionals to provide specific tailored advice on all aspects of asset transfers to enable an individual structure such transfers in a tax efficient manner.
Feel free to contact us for a confidential consultation.