It’s a sad fact but the more that you save during your lifetime the larger the potential tax bill you are likely to leave your loved ones when you die. Even on death the taxman takes a slice! And the slice is getting larger as tax free thresholds are reduced.
More and more people are going to be faced with large tax bills if they benefit from inheritances or gifts. There are instances where beneficiaries had to borrow and, in some cases, sell assets in order to pay their tax. However, with proper professional tax planning these liabilities could have been reduced, and in some cases eliminated.
Capital Acquisitions Tax (CAT) is the tax that has to be paid on the receipt of a gift or inheritance. In broad terms the tax is calculated by taking the value of the gift or inheritance, deducting the relevant tax-free threshold value (as indicated in the table below), and then applying tax at 30% to the balance. Previous gifts and inheritances from within the same group may have to be taken into consideration.
The amount of the tax-free threshold depends on the relationship between the giver and the receiver. In recent years, Revenue has systematically reduced these thresholds.
Since 7th December 2011, the CAT tax threshold for a son or daughter receiving a gift or inheritance dropped to €250,000 – having been over twice that amount in 2009. For a parent, brother, sister,
niece, nephew, grandchild it dropped from €54,254 to €33,208 and if you had any other relationship with the giver, the threshold dropped from €27,127 t0 €16,604
Suppose you receive a gift/inheritance from your parents to the value of €450,000 and assume you have not previously received any other gifts/inheritances from them.
Calculation: €450,000 less threshold of €250,000 = €200,000 x 30%
= €60,000 Capital Acquisitions Tax Due
Had this gift/inheritance been received in early 2009 it would have been tax free!
Proper tax advice could reduce or eliminate your tax liability
There are a number of tax reliefs currently available which can help to eliminate or reduce the tax payable. These include:
• Business relief;
• Agricultural relief;
• Dwelling house relief; and
• Favoured niece/nephew relief;
Many people are unaware that the family home falls within the Capital Acquisitions Tax net. A house left by an uncle/aunt can also fall within the net. However, if the recipient is living in the house then dwelling house relief may be available, but strict conditions must be met.
If in the example above the asset had been the family home and the dwelling relief conditions were met, then the liability could be reduced from €60,000 to zero.
If the asset in the example was farmland and the recipient qualified as a farmer, or if the asset was a business, then again the tax liability could be reduced or potentially eliminated.
Strict conditions must be met in order to qualify for these reliefs. Professional tax planning is essential to ensure you make the most of them.
Section 72 & Section 73 Policies
Where you do have a potential exposure to Capital Acquisitions Tax a Section 72 insurance policy or Section 73 savings policy may be an option. The proceeds of these policies are not taxable to the extent that they are used to pay Capital Acquisitions Tax. They can give you comfort by ensuring you are not leaving your loved ones with tax liabilities after your death.
Should you transfer assets now?
If you are considering gifting an asset during your lifetime (as apposed to in your will), a number of additional taxes also need to be considered. Gifting an asset during your lifetime can give rise to capital gains tax as a disposal for the giver, and have capital acquisitions tax and stamp duty implications for the recipient.
Given the current reduced values of property, businesses and shares and the fact that all of these taxes are based on the market value of the asset at the date of the gift, now could well be an opportune time to transfer assets.
With capital gains tax and stamp duty there are also a number of reliefs available, in particular where the transfer involves a family business, farm or house. However, again certain conditions must be met and restrictions are being introduced. In Budget 2012 the Government introduced restrictions on retirement relief to encourage the “timely transfer of assets” before the current owners reach the age of 66.
What might the future hold?
The Government’s four year plan states that the level of tax reliefs and exemptions applying to gifts and inheritances will either be abolished or greatly restricted in the future. With the threshold for children more than halved and the rate of tax increased from 20% to 30% this process is well under way. We don’t know how far it will go but it is clear that fewer reliefs may be available in the future.
It is therefore more important than ever that you get professional tax planning advice now to ensure that you are not missing out.
This blog is intended solely as an overview and should not be relied on as a substitute for seeking professional advice. For further information contact McLaughlin McGonigle, St Helens, St Oran’s Road, Buncrana, Co. Donegal. Tel +353 (0)74 9321420 / Fax +353 (0)74 9321421/ firstname.lastname@example.org
Authorised to undertake investment business services in Ireland by the Association of Chartered Certified Accountants.