Estate Planning also known as Inheritance Tax Planning is the act of preparing for the transfer of a person's wealth and assets after his or her death. Assets, life insurance, pensions, property, cars, personal belongings, and debts are all part of one's estate.
Believe it or not, you have an estate. In fact, nearly everyone does. Your estate is comprised of everything you own — your car, home, other property, bank and savings accounts, investments, life insurance, furniture, personal possessions. No matter how large or how modest, everyone has an estate and something in common — you can’t take it with you when you die.
When that happens — and it is a “when” and not an “if” — you probably want to control how those things are given to the family, friends or organisations you care most about. To ensure your wishes are carried out, you need to provide instructions stating whom you want to receive something of yours, what you want them to receive, and when they are to receive it. You will, of course, want this to happen with the least amount paid in taxes, legal fees, and court costs.
Capital Acquisitions Tax (CAT) is the tax charged when a gift or inheritance is received. CAT comprises two separate taxes - a Gift Tax payable on lifetime gifts and an Inheritance Tax payable on inheritances received on a death.
The beneficiary of the estate is primarily liable for the payment of Capital Acquisitions Tax. Whether or not a charge to tax arises depends on whether the disponer (the person who is “providing the gift or inheritance”) or the beneficiary (the person receiving the gift or inheritance) is resident or ordinarily resident in the state at the date of the gift or inheritance. If the disponer or the beneficiary is resident or ordinarily resident in Ireland, then the entire estate will be liable to Capital Acquisitions Tax here. If both the disponer and the beneficiary are not resident or ordinarily resident in Ireland, then only Irish property will be liable to tax e.g. Irish property, shares in an Irish company, money in an Irish bank account.
Who pays the tax?
It is the person receiving the gift or inheritance who is liable to CAT and not the person or estate providing the benefit.
For new gifts and inheritances received on or after 5th December 2001 tax is calculated according to the total of all gifts and inheritances received from all sources since 5th December, 1991.
The following CAT Tax Rate currently applies:
Tax Rate :
Group Threshold - NIL
Balance taxed at 33%
Capital Acquisitions Tax Thresholds
The Group threshold amounts vary depending on the relationship between the beneficiary and the disponer.
Group 1 Threshold €335,000:
Where the person receiving the property is a child of the disponer or, a child of the civil partner of the disponer, or, a minor child of a deceased child of the disponer or, a minor child of a deceased child of the civil partner of the disponer, or, a minor child of the civil partner of a deceased child of the disponer, or, a minor child of the civil partner of a deceased child of the civil partner of the disponer.
Group 2 Threshold €32,500:
Where the person receiving the property is a lineal ancestor of the disponer, a descendant of the disponer, a brother/sister of the disponer, or, a child of a brother/sister of the disponer, or, a child of a civil partner of a brother or sister of the disponer.
Group 3 Threshold €16,250:
All other cases. The threshold amounts are those applying currently.
This information is correct as of Jan 2020 but may be subject to change.
What Assets Are Liable To Inheritance Or Gift Tax?
CAT is a self- assessed tax. Where the assets are received as an inheritance the personal representatives of the deceased must list all assets and liabilities of the deceased when completing a Revenue Affidavit in relation to Inheritance Tax. Tax is levied on the total net value of all assets received by a beneficiary, other than a legal spouse or registered civil partner. All assets are taken into account, the family home, a second home or investment property, the value of all investments, including cash, pension and life assurance benefits as well as all personal property house e.g. contents, jewellery etc.
Certain reliefs and exemptions from Capital Acquisitions Tax apply to certain types of assets. These have been introduced over the years primarily to encourage private enterprise and to avoid the forced sale of a family farm, business or the family home in certain circumstances.
The main exemptions / reliefs are:
Spouse or Civil Partner Exemption- Gifts or inheritances received by one spouse or civil partner from the other are totally exempt from CAT.
Agricultural Relief –the value of farmland, buildings and stock can be reduced by 90% where the beneficiary is a qualifying farmer and holds the property for a minimum of 6 years.
Business Relief – can provide a similar reduction of 90% in the taxable value of certain businesses or private companies, where both the business and the beneficiary meet the qualifying conditions.
Family Home Relief - Exemption from Gift and Inheritance Tax is available on the value of certain “dwellings” with up to an acre of land where both the donor and the beneficiary meet certain conditions which ensure that the property was, and continues to be, their home.
Life Assurance Relief - If you take out a life assurance life cover or savings plan, specifically to pay Gift or Inheritance Tax, the funds paid out on the plan will not be subject to Capital Acquisitions Tax- provided they are actually used to pay the tax bill.
Do You Know
1. Small Gift Exemption:
Capital Acquisitions Tax / Gift Tax legislation allows for an exemption from Gift Tax for the first €3,000 of any gift taken by a beneficiary from any one ‘donor’. The €3,000 is an annual limit. What this means is that a beneficiary can receive up to €3,000 tax free in any one year from any donor, or even multiple donors, and this gift will not impact on their appropriate tax free group threshold.
2. Disposing Of Business Assets:
When business assets are disposed of, either through sale, gift or inheritance, a number of different tax charges may arise.
• A Capital Gains Tax charge may be incurred by the person disposing of the assets, even if the assets are being given as a gift. The current CGT rate is 33%.
• A Capital Acquisitions Tax charge may be incurred by the recipient of the gift or inheritance or where the sale price is below market value. The current CAT rate is 33%.
• Stamp duty is also payable on the lifetime transfer of assets. Different reliefs are available, which if applicable can reduce these tax charges.
• Retirement Relief from Capital Gains Tax
• Business Relief from Capital Acquisition Tax
3. Funding For A Gift Tax Liability
You can create a fund that can be used to pay a Gift Tax liability. The benefit of using a ‘qualifying’ life assurance savings plan to fund for the payment of gift tax is that, as long as certain conditions are met, the proceeds of the plan when used to pay your children’s gift tax bill will not increase their gift tax liability. If you give your children money to pay the gift tax from your deposit account, this will be seen by Revenue as an additional gift and will actually increase their tax liability.
4. Approved Retirement Fund
If you purchase an Approved Retirement Fund, it may create an Inheritance Tax liability for your children.
• Children under 21 - Inheritance Tax
• Children over 21 - Income Tax at 30%
Tax is a complicated subject. This gives only a very brief guide to some of the Inheritance and Gift Tax rules currently applying. These rules may change in the future. You should discuss your personal situation and the likely effect Inheritance and Gift Tax will have on your plans with your tax or financial adviser.
Financial Planning Standards Board
Certified Financial Planner