In this blog I look at who is liable for inheritance tax and what are some of options surrounding the liability?
Who has to pay inheritance tax?
The common misconception out there is that only people with great wealth will pay inheritance tax. The truth about it is that people with an average sized house and a half decent pension in Ireland could well leave behind a liability. This tax seems one of the most unfair taxes, as it taxes wealth that was earned generally through hard work and has been previously taxed .
As family sizes get smaller and house property prices rise, the liability for Inheritance tax has risen with it. The thresholds in Ireland have not risen in line with the increases in property prices or even matched inflation rates .
So how does inheritance tax work ? How much can you inherit tax free?
Revenue have issued 4 different categories of people and this is how they class them
Category 1
Spouses and Civil Partners. The good news here is both inheritances and gifts are exempt when passed from spouse /civil partner to each other . There is no limit on this inheritance.
Category 2
A son or daughter of the person giving the gift or inheritance including certain foster children or a minor child of a deceased parent of the disponer. Parents also fall within this threshold where they take an absolute inheritance from a child. You can inherit up to €335,000, and anything over that will be taxed at 33%
Category 3
A parent who inherits or receives a gift form a child that is not absolute . A direct blood relative ( Brother , sister , nephew , niece , grandchild , grand parent )
You can inherit up to €32,500 and anything over that will be taxed at 33%
Category 4
Anyone not covered in the above 3 categories can inherit €16,250.
Anything over that will be taxed at 33%.
So, here are some of the questions we regularly get asked
Who pays the Inheritance tax?
The person receiving the inheritance is liable for the tax.
Are there any exemptions for inheritance tax ?
Yes there are currently 6 exemptions
1 . Business / Agricultural Relief
This relief works by reducing the market value of agricultural or business property by 90% . Visit revenue.ie for full definition on this .
You will be exempt from CAT on the inheritance of a dwelling house if:
The house was the only or main home of the person who died (this condition does not apply if you are a dependent relative)
You lived in the house as your only or main home for the three years immediately before the date of the inheritance
You do not own or share an interest in another property
You do not acquire an interest in any other house from the same disponer between the date of the inheritance and the valuation date
The house continues to be your only or main home for six years after the date of the inheritance.
Favourite Nephew/ Niece
You can nominate a favourite niece of nephew who has worked with you for a minimum of 5 years in your business prior to the inheritance . If conditions are met then the favourite Niece or Nephew will fall into category 2 and can receive up to €335,000 in inheritance .Full conditions are outlined on revenue.ie
Annual Gift Exemption:
You may receive a gift up to the value of €3,000 from any person in any calendar year without having to pay Capital Acquisitions Tax (CAT). This means that you may take a gift from several people in the same calendar year and the first €3,000 from each disponer is exempt from CAT.
Can I use a Life Insurance policy to pay the inheritance tax bill?
If you have a standard life assurance policy in place, the proceeds will be added to the estate and will therefore be liable for inheritance tax when you pass . However Revenue have a special approved inheritance tax policy called a section 72 policy which can be used to pay the tax and the proceeds are deemed to be outside the estate .
How does a Section 72 policy work?
A section 72 policy works the exact same way as any other life assurance policy , in that you take out an amount of cover , pay the premium and upon death the insurance company pays out . The difference is that it is revenue approved and providing the proceeds are used to pay the inheritance tax then the proceeds are tax free.
Here is an example of how a section 72 policy works
Parents have 1 child
Likely to leave an estate of €1,000,000
When parents die tax bill will be calculated as follows
Estate Value - €1,000,0000
Less threshold ( Category 2 ) - €350,000
Total - €650,000
@ 33%
Total Tax Bill due in October - €214,500
If the parents were to put a Section 72 policy on place for €214,500 then the proceeds from the policy would pay €214,500 out and cover the Inheritance tax bill and the child would inherit the whole estate of €1,000,000
Why doesn’t everyone who is due inheritance get a Section 72 policy?
There are a good few reasons why reasons why I believe these polices aren’t more common.
Firstly I would say people do like talking about death and money . It can be an awkward conversation but as explained above can be a very beneficial to the person receiving the inheritance.
A lot of people look to take these policies out later in life. If there are major health issues then the insurer is unlikely to provide cover or will provide it but at a much more expensive rate.
The age limit on taking out these policies is 74.
What if I am unable to take out a Section 72 policy?
As mentioned above some people may be unable to take out a section 72 policy as they do not the medical requirements of the insurer. Another option that may be worth looking at is a Section 73 savings policy.
What is a section 73 savings policy and how does it work?
The purpose of the Section 73 approved savings policy is to cover any gift tax that may arise from a gift to a person when still alive. The exact same categories and thresholds above apply to the any gift you wish to make to someone . In order for the policy to be used towards gift tax it must be in place for a minimum of 8 years .
Here is a working example of how this policy may work
John currently has 6 properties with a net asset value of €3,000,000
John ( Parent ) wishes to gift one of his properties to his daughter Mary In 8 years . The property is currently valued at €400,000 and John estimates it will be worth €500,000 in 8 years time .
If John just gifts the property to Mary in 8 years time then the following tax liability will occur based on today’s thresholds etc .
Value of House €500,000
Less CAT threshold (€335,000)
Less Annual Small Gift excep (€3000)
Taxable Asset €162,000
Gift Tax Liability 33% of €162,000 €54,360
What are my options here?
Set up section 73 savings policy to fund the €54,360 over 8 year period. Providing the proceeds from this policy are used to pay the tax liability within 1 year of the tax of the gift then there is no liability. Again there are revenue rules around these policies and these can be found on revenue.ie
Anyone who has significant assets including their family home that they intend to gift to someone should strongly consider this as an option.
If you are interested in discussing your possible inheritance tax liability or any of these policies then feel free to give me a shout on 086 2293032 or drop me an email on rob@citywidefinancial.ie
Comments