How to avoid Inheritance tax (legally)

Inheritance tax is something people forget about until it’s too late. In 2018 revenue collected over €466.3 million from inheritance tax payments, but it can come as a shock during a time of bereavement.

There are loads of ways to ensure you’re prepared for this Revenue bill, make sure you’ve thought ahead and planned for your inheritance tax.

It’s also important to realise what payment you will have to make on an inheritance and how to prepare for it.

Step 1

Capital gains tax (CAT)

Capital Acquisitions Tax (CAT) is a tax on gifts and inheritances. You can receive gifts and inheritances up to a certain amount over your lifetime.

Once you pass this amount you will have to pay Capital Acquisitions Tax (CAT). Gifts become inheritances if the person dies within two years of giving the gift.

For taxation gifts and inheritance are treated as the same.

Example 1:

Johns parents gave him a €80,000 as a deposit for a house purchase. When his last parent died he recieved and inheritance from their estate of €300,000. For Capital Acquisitions Tax his the total amount to declare is €380,000.

Using the basic revenue guide John has a Capital Acquisitions Tax (CAT) threshold of €320,000. So he will have to pay Capital Acquisitions Tax (CAT) on the €80,000.

Step 2

Who has to pay inheritance tax

The person who is receiving the gift or inheritance is responsible for paying any Capital Acquisitions Tax (CAT) that is required.

You can pay Capital Acquisitions Tax (CAT) online here or by filing form IT38.

Step 3

How much will you have to pay

You do not have to pay any Capital Acquisitions Tax (CAT) if the value is under the threshold. Thresholds are determined by your relationship to the person giving you the gift or the inheritance.

Technical terms to watch for: Disponer – the person giving the gift or the inheritance.

Relationship to the disponer Son/daughter Parent* / Brother/Sister/ Niece/Nephew/Grandchild Relationship other then two listed
Group threshold on or after 10 October 2018 €320,000 €32,500 €16,250

The standard rate of CAT for gifts and inheritances received on or after 6 December 2012 is 33%.

Example 2: Son/Daughter

  • Debbie has inherited €630,000 from one of her parents.
  • The disponser was a parent.
  • €630,000 (inheritance) – €320,000 (Son/daughter threshold).
  • Tax payable on remaining: €310,000.
  • €310,000 @ 33% =  €102,300.
  • Debbie owes revenue €102,300.

Example 3: Niece

  • Debbie has inherited €60,000 from one of her uncles.
  • The disponser was her mothers brother.
  • €60,000 (inheritance) – €32,500 (Niece threshold).
  • Tax payable on remaining: €28,000.
  • €28,000 @ 33% =  €9,240.
  • Debbie owes revenue €9,240.

Example 4: Niece – through marriage

  • Debbie has inherited €25,000 from one of her uncles.
  • The disponser was her aunts husband.
  • €25,000 (inheritance) – €16,250 (Niece threshold).
  • Tax payable on remaining: €8,750.
  • €8,750 @ 33% =  €2,887.50
  • Debbie owes revenue €2,887.50.

Step 4

reduce your inheritance tax

As you can see from some of the above examples, you can have substantial tax liabilities to pay. It’s really important to make sure you plan ahead to try and reduce those tax payments, as a large tax bill can be quite distressing during bereavement.

If you are going to be the gifter (disponer)

  • Longterm planned cash inheritance
  • Consider depositing €3,000 a year into an account in their name.
  • You can receive a tax free gift from anyone of up to €3,000 every year.
  • This can be a good idea for grandparents to grandchildren.
  • Each grandparent could give €3,000 a year, potentially netting a tax free payment of €12,000 per a year. (Based on 4 grandparents).

If you are estate planning as a parent?

  • Write a will and make sure your executors know the name and location of the solicitor.
  • On the death of the 1st parent transfer all assets to the 2nd parent. (Transfers between spouses or civil partners are tax free). 
  • Exemption for Dwelling House: you won’t have to pay Capital Acquisitions Tax (CAT) if all of the following applies to you.
    1. The house was the only or main home of the person who died (this condition does not apply if you are a dependent relative).
    2. You lived in the house as your main home for the three years before the person’s death.
    3. You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.
    4. The house is your main home for six years after you receive the inheritance. This does not apply if you are over 65.

 If you are a recipient in a will?

If you receive a gift of a house on or after 25 December 2016, you will be exempt from CAT if:

  1. You are a dependent relative of the person making the gift because you are:
    1. permanently and totally incapacitated due to a physical or intellectual disability, and you are unable to earn a living
    2. 65 years or older at the date of the gift.
  2. You lived in the house as your main home for the three years before the person’s death.
  3. You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.
  4. The house is your main home for six years after you receive the inheritance. This does not apply if you are over 65.
  • Favourite Niece/Nephew – you can treat a Niece/Nephew as a child if they have worked for you or your spouse for the last 5 years.
    • 15 hours per a week for a small businesses.
    • 24 hours per a week for all other businesses.
    • Excludes investment assets.

Step 5

Using insurance to pay inheritance

TA section 72 policy is a Revenue-approved life insurance policy. As long as certain conditions are met, the proceeds of this policy will not increase the beneficiaries Inheritance Tax bill. Instead, it will be used to pay the outstanding Inheritance Tax bill on their other inheritances.

Example: Total Inheritance over €320,000

  • Laura and Steve have one child, Saoirse.
  • They will be leaving their daughter an estate worth €800,000.
  • Saoirse’s Tax-Free Threshold is €320,000.
  • Her Taxable Inheritance is: €480,000. This is taxable at 33%.
  • Saoirse’s Inheritance Tax Liability is: €158,400.

Therefore, when Laura and Steve die, 19.8% of Saoirse’s Inheritance will be owed in tax. If Laura and Steve’s assets are not in cash, and require the sale of property, for example, this can create difficulty for Saoirse.

 

Laura and Steve could effect a Section 72 Life Insurance policy to pay out €158,000. This amount will be received tax-free if used to pay Saoirse’s Inheritance Tax bill.

Setting Up a Section 72 Insurance Policy: Where to Start?

  • Laura and Steve will be the owners of the plan. They must also pay the premiums, as they are the ‘Disponers’ leaving the inheritance.
  • The policy must be set up as a Section 72 policy from the outset. An existing policy cannot be ‘switched’
  • A joint plan can only be taken out by a married couple, or civil partners.
  • The term selected at the outset must be for at least 8 years.
  • Laura and Steve must continue to pay regular premiums on this policy, and the policy cannot be restarted after a break in payments.
  • If the value of Laura and Steve’s estate goes down, any excess left from paying the Inheritance Tax liability will then be subject to Inheritance Tax.

Contact Greenway to Discuss your estate planning questions

We specialise in finding out answers to your queries, and giving personalised advice. Call us on 01 853 2727, or contact us: