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HORSE SENSE: Inheritance Tax and Gift Tax - hidden tax that can be avoided
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HORSE SENSE: Inheritance Tax and Gift Tax - hidden tax that can be avoided
on 30 October 2020
Financial Planning Manager Niall Rooney explains the steps involved in reducing the potential inheritance tax a beneficiary will have to pay on receiving an inheritance

THEY say the two biggest fears in life are paying tax and speaking in public! Luckily with a small bit of planning both hurdles can be overcome.

In 2019, the net receipts from Capital Acquisitions Tax (CAT) was €522 million. €455 million of this was made up of Inheritance Tax. So as one can see, there is large tax take by Revenue. It is a very subtle tax at a time when families must deal with a bereavement.

A survey conducted by Coyne Research for Irish Life in 2018 of 1,000+ adults in Ireland showed very low awareness of the rate of inheritance tax, as well as inheritance tax thresholds. Only one in six of those surveyed were aware of what the inheritance tax rate is, and a majority were not aware of the inheritance thresholds across different categories of recipients. So, if individuals are not aware of this tax it is very unlikely that they will make any plans to address it.

In this article I will look at putting the building blocks in place to reduce or negate the potential inheritance tax a beneficiary will have to pay on receiving an inheritance.

The first port of call in planning for this tax, is to make a will if you have not done so already. Two out of every three people in Ireland today have no will made. The creation of a will immediately gives you an idea what the likely tax is to be paid on the estate, when it is passed on to any beneficiary or loved one (once you know the value of what is being willed).

Thresholds

The amount of Inheritance Tax and Gift Tax, known collectively as Capital Acquisitions Tax (CAT), payable will be a function of the relationship between the person who made the will and the person receiving the benefit

In 2010 the CAT rate was 25% and in 2020 this rate is 33%. Similarly, in 2010 the Class 1 threshold for inheritances to children was €414,799 and in 2020 it is €335,000.

So, as you can clearly see with the reduction in the main threshold over the years and an increase in the tax rate to 33% this tax has become an increasingly significant source of tax revenue for the State.

Reliefs

It is vitally important to establish if you qualify for any of the reliefs afforded by revenue to mitigate against this tax. The three main reliefs that should be examined to see if you meet the conditions are business, agricultural and dwelling house relief. I do not propose to dwell upon the minutiae of these various reliefs, suffice to say that they need to be explored or indeed planned.

Example: Estate planning

A widow died in February 2019 who had made a will. She had two sons and a daughter and her husband had died prior to her in 2010.

The parents had affected a S.60 Policy with Irish Life (now S.72) in 1998 when both were in good health and in their mid-50s. It was a Joint Life Second death policy for circa €1.4 million.

Their two sons and daughter had used up most of their CAT Threshold of €320,000. The estate of their late mother was to be split one third each. Business relief and agricultural relief did not apply. However, the private dwelling house relief did apply. The Inheritance Tax payable by the two sons and daughter on their mother’s death in February 2019 was circa €1.4 million and the S.72 policy paid out circa €1,426,000 in April 2019. The premium on this S72 policy was €1,321 per month and the total amount of contributions paid by their late parents up to the date of the payment of the claim in 2019 was €343,363.

When probate was issued nearly 12 months later these policy proceeds were used to pay the inheritance payable by her two sons and daughter. It meant the estate was inherited ‘tax free’ by her two sons and daughter.

Good solid professional advice is vital when planning your will.

Five tips to consider for estate planning

1. Have the conversation early in life so one can plan.

2. Make a will if you have not done so already.

3. Establish if you qualify for any of the reliefs.

4. Consider utilising the annual small gift tax exemption of €3,000 (€6,000 for a couple) to reduce the value of one’s estate.

5. Seek Inheritance Tax Planning advice from a financial advisor (not a bank as they are generally tied to one provider) to put a section 72 life policy in place if the need arises.

Niall Rooney B.Comm.ACII.QFA.FLIA is a Financial Planning Manager with CityLife Galway. For more information call 091 520608.

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