In our ongoing series of Online Financial Planning Seminars, we discussed how to Protect your Family from Inheritance Tax. In this blog we will look at, what is Inheritance Tax? What type of inheritances are liable to Inheritance Tax? what Exemptions and Reliefs are available? how can I plan for Inheritance Tax and how does the tax apply to Cohabiting Couples?
What is Inheritance Tax – Inheritance Tax comes under the Capital Acquisition Tax (CAT) heading, which can generate significant tax liability for the person receiving an inheritance following the death of a family member, relative or non-family member.
It is common to hear of properties and other assets been sold to fund an unexpected Inheritance Tax bill. Gifts received other than on death are also liable to Capital Acquisition Tax but in this blog, we are just going to take a high-level look Capital Acquisition Tax on death. The current Capital Acquisition Tax rate is 33% and is payable by the person receiving the inheritance and, on all inheritances, received since December 5th, 1991.
What type of inheritances are liable to Inheritance Tax? All assets inherited over a certain value are subject to Inheritance Tax such as property, investments, and deposits. If someone dies without leaving a Will (known as intestate) their estate is distributed as set out in the Succession Act 1965, as a result you may receive inheritance and be liable to Inheritance Tax.
What Exemptions and Reliefs are available? There are a number of exemptions and reliefs from Inheritance Tax. The common exemptions are where assets are inherited between spouses or civil partners, in this case there is no inheritance tax liability. Another common exemption is the Dwelling House Exemption, if you inherit a house it will be exempt from Inheritance Tax if it has been your main residence for at least three years prior to the date of the inheritance, and you have no other interest in another property and the house remains your main residence for at least six years after the date of the inheritance.
Depending on your relationship to the person you received the inheritance from you will have an inheritance tax exemption or threshold.
|Current CAT thresholds (from 9 October 2019)|
|Group A: €335,000||Applies where the beneficiary is a child (including adopted child, stepchild, and certain foster children) or minor child of a deceased child of the disponer. Parents also fall within this threshold where they take an inheritance of an absolute interest from a child.|
|Group B: €32,500||Applies where the beneficiary is a brother, sister, niece, nephew or lineal ancestor or lineal descendant of the disponer.|
|Group C: €16,250||Applies in all other cases.|
You can receive an inheritance and use your exemption from each group separately. Example – you can receive an inheritance of up to €335,000 from a parent, and still have an exemption of €32,500 from a brother or sister or €16,250 from anyone else. In theory you could receive three inheritances of up to €383,750 tax free. It is important to remember the exemption thresholds are calculated based on all inheritances combined and received since December 5th, 1991.
Even with exemptions and thresholds, Inheritance Tax can be significant, if we look at an example: following the death of both parents Mary inherits a property valued €450,000, Credit Union savings of €30,000 and a Life Assurance policy proceeds of €100,000. The total value of the assets inherited are €580,000 less Mary’s group A threshold of €335,000 leaves €245,000 assessable for Inheritance Tax at 33% or an inheritance tax liability of €80,850.
How can I plan for Inheritance Tax? In the above example, it would have been possible for Mary’s parents to avoid leaving their daughter with this large tax bill and possibly not having to sell the family home or take out a large loan to pay the Inheritance Tax liability. Section 72 of Capital Acquisitions Tax Act 2003 allows for the setting up of a Life Assurance policy in trust, where the proceeds of the policy can be used to pay the inheritance tax liability.
Cohabiting couples and Inheritance Tax? Cohabiting couples who are not married and in the event of death of either partner are considered strangers from an inheritance tax liability and will only receive group C threshold exemption of €16,250. This potentially leaves the remaining partner with a considerable Inheritance Tax liability. A common error we see with some financial advisors is setting up a joint life assurance policy for cohabiting couples, this can be a costly error for the remaining partner and their Inheritance Tax liability. The correct approach is setting up two single life assurance policies put in trust to each partner.
We regularly advise and work with our clients on Inheritance Tax Planning and would be happy to provide you with a free and no obligation review. We can be contacted on [email protected] or visit our website www.cuinsured.ie where you can chat to us live, request a call back or schedule a meeting with one of our Qualified Financial Advisors.
CUinsured Ltd Trusted by Credit Unions in Ireland. CUinsured Ltd is regulated by the Central Bank of Ireland. This article is for discussions purposes only and should be read in conjunction with the relevant product terms and conditions, and Revenue Rules.