“Inheritance Tax is a voluntary tax paid by those who dislike their heirs more than they dislike Revenue”
This statement is essentially true, Inheritance Tax is entirely avoidable if you are motivated enough. With the correct planning there is no reason why anyone should have to pay Inheritance tax at all.
The whole topic of Inheritance tax is back in the news again because Revenue recently announced that last year they collected a record amount of over €466m, mostly coming from grandchildren, nieces and nephews, primarily driven by increasing property prices and the fact that tax free thresholds have essentially remained unchanged for a number of years.
The Group A inheritance Tax Threshold, the maximum tax free amount which can be passed from a parent to child is currently €320,000, it has not been this low since 1999. The Group A threshold was at its highest in the noughties, peaking at € 542,544 in 2009 before being slashed thereafter as the government attempted to widened the Tax base. Not only have the thresholds decreased greatly but the rate at which the Tax is applied has also increased from 20% back in 2007 to 33% today. If a child inherited a property worth €550k from a parent in 2008, their tax liability would have been less than €3,000. Today, the same inheritance would incur a Tax bill of €78,900. Given that the average price of a House in Dublin is currently €433,000 it’s not surprising that more than half of all inheritance tax is paid in Dublin, followed by Cork in second place.
While one third of all Inheritance tax collected last year was paid by children, the big income earner for Revenue was in fact those in the category B threshold, this refers to other types of relatives such as inheritances from grandparents, brothers or sisters, or aunts and uncles. The tax free threshold from this category is just €32,500n (was €54,500 back in 2009). With such a low threshold, the figures show that this category accounted for 50% of all inheritance tax receipts in 2018. Non-relatives who fall into Category C and have a lifetime threshold of only €16,250 accounted for 15% of all inheritance tax yields.
As I mentioned earlier, Inheritance Tax is essentially voluntary and can be greatly reduced if not entirely eliminated with some advance planning.
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 avoids the possible need to liquidate assets to clear down the tax bill.
Policies taken out under Section 72 are generally ‘whole of life’ policies, 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.
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 BBS QFA CFP® is the owner of Wealthwise Financial Planning, Block C, Hartley Business Park, Carrick on Shannon, www.wealthwise.ie. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. 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.