I’m not sure if Benjamin Franklin was referring to Irish Inheritance Tax when he made this famous quote but it would certainly have been apt given that Ireland has one of the highest rates of Inheritance Tax in the developed world.
The vast majority of the wealth in Ireland is currently held by those over the age of 65, as the population ages a huge intergenerational transfer of wealth is already underway.
Numerous changes in recent budgets have altered the perception of CAT (Capital Acquisitions Tax) from what was seen by many in the past as a tax only applicable to the very wealthy to something which now potentially impacts a large cohort of the population. With lifetime Inheritance thresholds having almost halved since the mid 2000’s, the prospect of an Inheritance tax bill is now a reality for many people.
The group A threshold between a parent & child now stands at only €335,000. This is a reduction of almost 40% from a high of €542,544 in 2009, this reduction was introduced by the government presumably to reflect falling asset values since the boom times. During the same period, the tax rate applicable to an Inheritance has increased from 20% to 33%.
An Inheritance of €600,000 passed from a parent to their child in 2009 would have triggered a tax bill of only €11,941, today that same Inheritance would incur a tax liability of €87,450.
The prospect of a CAT bill means many people will be faced with one of two choices in order to meet any CAT liability on their Inheritance – they either dip into their own resources or sell part of their inheritance. Having to sell part of their inheritance to meet the tax liability may be a very hard choice to face, especially going through the very difficult period following the death of a parent, for example.
However, there are a number of solutions which can reduce any potential CAT liability down the line. Many people chose to put in place a Section 72 life assurance policy, to protect their family by providing a cash sum which will fund the expected Tax bill.
Section 72 policies are policies that will pay out a lump sum in the event of the death of a parent. The proceeds of the policy are not subject to tax provided it is used to clear any inheritance tax bill. The recipients then avoid the possible need to liquidate assets to clear down the tax bill.
Policies taken out under Section 72 are generally ‘whole of life’ policies, i.e. protecting a person for the whole of their life with no age of cessation and as a result can sometimes be quite expensive.
A plan effected under Section 72 CAT Consolidation Act, 2003 effectively gives you the option of rather than letting tax legislation decide how your estate will be distributed – you can pass on your assets in the way you wish.
There is also an annual small gift exemption allowed by revenue of which most people in Ireland are currently not availing.
This is a “use it or lose it” annual allowance which enables an adult to gift up to €3,000 in any year with no tax liability whatsoever. One practical application of this is where parents or grandparents gift money to children.
Each adult can gift each child up to €3,000 in any year with no tax liability for the child and without impacting the child’s lifetime Group A Inheritance threshold. For example, each parent could gift €3,000 pa to a child (€6,000 pa if it comes from a joint account) thus enabling them to gift €60,000 over a 10 year period completely tax free, this equates to a potential tax saving of €20,000.
A key element of this is that the ownership of the money comprising the gift has to clearly pass to the beneficiary, i.e. into a bank account in the beneficiaries’ name.
Succession planning is a complex area where the rules are constantly changing but with a little forethought and preparation you can help preserve your wealth for loved ones and future generations.
Barry Kerr is Managing Director of Wealthwise Financial Planning who are based in Block C, Hartley Business Park, Carrick on Shannon. All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland #CI6614