early retirement diary planning make sense of inheritance tax planning

Inheritance Tax Planning

What is Inheritance tax?

Inheritance or Capital Acquisitions Tax (CAT) is the tax payable on the estate of someone who has passed away. Estates are made up of various assets, for example, money, property, pensions, and possessions. How much tax you’ll need to pay will depend on the entire value of the estate. 

You can receive gifts and inheritances up to a set value over your lifetime before having to pay Capital Acquisitions Tax. Once due, it is currently charged at the rate of 33%, as of 6 December 2012.

Who has to pay inheritance tax in Ireland?

inheritance Tax Thresholds 2023 ireland

It falls to the recipient or beneficiary to pay the inheritance tax (IHT), and is applicable to all property in Ireland.

Capital Acquisitions Tax is also payable by the recipient on property located outside of Ireland if the person either giving or receiving the inheritance is resident in Ireland for tax purposes.

When do you have to pay inheritance tax?

Inheritance tax must be paid by the 31st of October for any inheritance dated in the year to the 31st of the previous August.

This means that if you inherit a property any time between 1st September and 31st August, you must pay capital acquisitions tax by October 31st. 

For example, if you inherit a property on 3rd September 2023, you will have to pay CAT by 31st October 2024. If you inherit on 30th August 2023, you will still have to pay CAT by 31st October 2023.

You must complete form IT38 for a gift or inheritance tax return, and you can pay CAT online. Note that you will be charged a percentage of the tax you owe if you pay late, as is the case with late payments on other types of taxes.

How much is inheritance tax in 2023 and how is it calculated?

The standard rate for inheritance tax in Ireland in 2023/24 is 33%

However, there are exemptions to paying inheritance tax (more on those below). These exemptions depend on the relationship between the recipient of the inheritance and the person you are inheriting from.

What is a disponer and beneficiary?

A disponer is the person who gives you the gift or inheritance, and the beneficiary is the person who receives the gift or inheritance. A gift becomes an inheritance if the disponer dies within two years of giving the gift.

Inheritance tax thresholds

Firstly, gifts and inheritances given or received by a civil partner or spouse are exempt from CAT. If you are a widow, widower or a surviving civil partner, you may be eligible to additional relief. You also do not need to pay CAT on a gift with a value of €3,000 or less from any one person in any one calendar year.

Tax-free thresholds depend on your relationship with the disponer (the person giving the gift or inheritance).

Tax-free thresholds

Group A – a tax-free threshold of €335,000. This threshold applies if you, as a beneficiary, are:

  • A child, including adopted, step- and foster (in some circumstances), of the disponer or the disponer’s civil partner
  • A minor grandchild of the deceased disponer if their child (your parent) is also deceased
  • A parent inheriting an absolute interest of an inheritance on the death of your child

Group B – a tax-free threshold of €32,500. This threshold applies if you, as a beneficiary, are:

  • A parent of the disponer, where you take limited interest or a gift
  • Siblings of the disponer
  • A child of a brother or sister of the disponer
  • Nieces and nephews of the disponer
  • A lineal ancestor, such as a grandchild of the disponer

Group C – a tax-free threshold of €16,250. This threshold applies if you, as a beneficiary, are:

  • Someone with a relationship to the disponer, on the date of the gift or inheritance, that isn’t covered in the above groups.

Additional inheritance tax exemptions

There are also three instances in which you may be exempt from paying any inheritance tax.

  1. If you have inherited a property at some point since 25th December 2016 and you meet all of the following criteria:
    • You lived in this property and it was your main residence for three years before your donor’s death
    • The property was the donor’s only home
    • You do not own another house, including another house you may have received in the same inheritance
    • You reside at this property and it’s your main home for six years after you receive the inheritance (unless you are aged over 65)
  2. If your inheritance comes from your spouse or civil partner
  3. If the deceased is a child who has taken a non-exempt gift or inheritance from a parent within the previous five years, the parent is then exempt from inheritance tax

How much of your estate will you leave to the taxman when you die?

For every €1,000,000 you pass to your estate, without careful planning, it may lead to an inheritance tax liability of up to €330,000.

Source: Capital Acquisitions Tax Consolidation Act 2003 (as updated)

Poor estate planning could also lead to:

The break-up of your family or company assets

Your assets have to be sold to cover the tax liability

Your family has to borrow to pay the tax bill

Excessive or unnecessary tax bills

Potential family conflict

This tax can become a burden when your finances are tied up in your business or property and cash cannot be easily accessed.

If you do not plan ahead your family may have to make the difficult decision to sell your business or family home for a potentially lower price than its real value.

This is a tax that can be avoided if planned for properly

INHERITANCE TAX PLANNING

HERE ARE THE 6 STEPS TO TAKE TO MINIMISE OR REDUCE THIS TAX BILL

By failing to plan, you are preparing to fail

happy family

TALK TO YOUR FAMILY

Talk to your family to sort out any grey areas. Take note of your family’s circumstances and future plans before you finalise your own.

Two business people sitting at a cafe working on a new project using a laptop. Young businesswoman taking notes and a businessman working on a laptop computer to discuss business protection insurance

GET ADVICE

Careful planning can mitigate a lot of the problems with passing on assets, Seek taxation, legal, and financial advice to put a robust inheritance plan in place.

LIST YOUR ASSETS

This might seem like an obvious step many people don’t list their assets when they are alive and this can lead to confusion at best and animosity at worst as a result.

man reading financial file with pen in hand

MAKE A WILL

Once you have listed your assets, make a will. If your circumstances change then add a codicil or, make a new will.

Forsythe Financial Planning laptop with pension planning graphs

PUT A PLAN IN PLACE

Having taken on board legal, taxation, and financial advice you’re ready to make a plan.

father and son walking in woodland

USE LIFE INSURANCE WISELY

We can advise you on how to use a life insurance policy/ies to pay your dependent’s tax bill.

Using Life Insurance to fund CAT & Inheritance Tax bills

Section 72 & Section 73 (formerly Section 60 & 119 Policies)

Relief was introduced by Section 60, of the 1985 Finance Act (now contained in Section 72 of Capital Acquisitions Tax Consolidation Act 2003) to allow people to plan for the payment of Inheritance Tax in an efficient way.

If a life assurance plan is put in place to provide for the tax, the Revenue will not charge Inheritance Tax on the policy proceeds if the money is used to pay Inheritance Tax arising on the death of the lives assured under the plan.

The relief is granted subject to certain Revenue conditions:

· The plan must be expressly effected under the provisions of Section 72; normally the plan is endorsed to this effect when it is issued.

· To qualify for Section 72 relief the person covered under the plan must also pay the premium.

· A joint-life plan can only be taken out by a married couple or registered civil partners

· The Policy must be a flexible/whole of life plan to be acceptable to the insurer

In essence once the insurance policy is put in force for the payment of the Inheritance tax liability (ie put in trust for the children/beneficiaries to pay the actual Inheritance tax bill) then it is acceptable to the Revenue.

The original Section 72 legislation envisaged a protection plan (term assurance, whole life type plan) being taken out to provide a cash payment on death to be used to fund inheritance tax liabilities.

Section 73 Relief – formerly known as Section 119 Relief

Section 119, of the 1991 Finance Act (now Section 73 CAT Consolidation Act) introduced a complementary relief for the proceeds of certain plans in the payment of Gift Tax. The plan proceeds in the event of a full or partial surrender would be exempt from Gift Tax when used to pay Gift Tax in connection with a lifetime gift made by the owner of the plan, within one year of the encashment of the plan.

Again certain conditions apply.The conditions are similar, but there are some differences in the conditions for Section 72 and Section 73 relief:

  • The plan must be expressly effected under the provisions of Section 73; normally the plan is endorsed to this effect when it is issued.
  • A joint-life plan can only be taken out by a married couple or registered civil partners.
  • You must continue to make regular premium payments for at least eight years.
  • If you stop paying regular premiums, even after the eight-year period, you cannot restart.
  • Your premium cannot increase or reduce by more than 50% in any continuous eight-year period.
  • Once regular premiums have been paid for at least 8 years, any encashment from the plan after the plan has been in force for 8 years will be exempt from Gift Tax when used to pay Gift Tax within one year of making the encashment.

Section 73 – Using a Savings Plan to pay Gift Tax

Section 73 is designed to allow people to use the cash value of a savings plan, or combined life and savings plan, to pay Gift Tax during their lifetime.

The main difference in the conditions for Section 73 versus Section 72 relief is that Section 72 is a life insurance policy specifically taken out to cover an Inheritance Tax liability but a Section 73 is a Savings Plan designed to pay off any Gift Tax liability that may occur in the future.

If there is a death before the eight year rule is reached then it is our belief that the proceeds of the Section 73 – Savings policy may actually be used to offset the Inheritance Tax liability.

LIFE ASSURANCE TAX SAVINGS EXAMPLE

John and Mary are a married couple with one daughter Fiona, age 34, who lives at home.

They have the following asset profiles:

  • Family Home (Mortgage Protection in place) €253,948
  • John’s Pension Scheme Death Benefit €203,158
  • Investment Property €190,461
  • Holiday Home €114,276
  • Life Policy in John’s name, in trust for Joe €63,487

John dies and his estate goes to his wife, apart from the proceeds of the life policy which are paid directly to Joe. There is no obligation to make a CAT return and there is no inheritance tax liability arising on Brian’s death. Joe uses the proceeds of the life policy towards the purchase of an apartment which he moves into.

Mary dies four years later. She had kept the house, now worth €444,408 and, the holiday home now worth €152,368. She invested €126,974 of the pension scheme death benefit in an apartment. On her death, the apartment is now worth €203,158. She also has the other investment property which is now worth €317,435. She leaves everything to Moonbeam as follows:

  • Family Home €444,408
  • New Apartment €203,158
  • Original Investment Property €317,435
  • Holiday Home €152,369
  • Total Estate Value €1,117,369

Fiona’s tax liability is calculated as follows :

  • Taxable value of current Inheritance €1,117,369
  • The Taxable value of previous gifts (ie life policy in trust) €63,487
  • Taxable value of aggregate €1,180,856
  • Group Threshold amount (€335,000)
  • Taxable balance @ 33% €845,856
  • Total Tax Liability €279,132

Unless his parents had put in place a ‘SECTION 72/73 policy (Life Assurance) to pay the Liability arising. Fiona may have no option to sell one of the assets to meet the tax bill which is due.

Important Warning

Inheritance Tax Planning requires Taxation and Financial advice. In addition to seeking financial advice to examine how a life insurance policy may mitigate your tax bill, we strongly recommend you seek specialist taxation advice from a qualified taxation advisor.

Qualified Financial Advice from a Trusted Advisor

Get in touch to see if we can help

If you’d like to discuss Inheritance Tax Planning,

email ffp@live.ie or contact Forsythe Financial Planning on 087 2506365