Recent research conducted on behalf of Irish Life found that many people in Ireland intend to leave significant estate values as an inheritance, but often have little understanding of the potential inheritance tax implications (also known as CAT – Capital Acquisitions Tax) for their children.
This research suggests a fifth of over 55-year-olds expect to leave over €500,000 as an inheritance and a quarter of over 65-year-olds expect to also leave the same amount.
These are significant sums of money that could mean hefty tax bills for the beneficiaries, but 84% of those surveyed did not know what the current inheritance tax rate is and two thirds of people did not know what the tax-free thresholds are.
So, what are current inheritance tax rules for children?
The current inheritance tax threshold allowance for children in Ireland is €320,000. This means that any inheritance received by a child over €320,000 will incur a tax liability of 33%.
Strict time periods under which inheritance tax becomes payable can also create a strain on a person’s ability to pay this tax, as in many cases the individual may have to sell some of the assets inherited in order to pay the tax.
A very simple example of inheritance tax liability in operation is:
A surviving parent passes away leaving the following assets to their two children (divided equally). The value of the assets is as follows:
|Family Home Worth||€550,000|
|Holiday Home Worth||€225,000|
|Investment and Cash Assets||€500,000|
|Total Value of the Estate||€1,275,000|
|Value to each child (/2)||€637,500|
The children can inherit the first €320,000 tax free each. The balance of €317,500 (€637,500 to each child – €320,000 tax free threshold) is liable for inheritance tax at 33% = €104,775 Inheritance Tax for each child.
So, what can be done to alleviate an inheritance tax burden?
Inheritance planning is crucial, and some of these issues can indeed be planned for in advance.
For example, a particular type of Life Insurance Policy (Section 72 Policy) can be set up under trust for your beneficiaries. Such a policy will provide for a lump sum on death to your beneficiaries which can then be used to pay the inheritance tax liability. Provided the proceeds of the life policy are used to pay the tax liability, the proceeds of this life policy are not taxable when received by the beneficiary.
The ability to leave an inheritance to a family member is a wonderful gesture and one that would no doubt never be forgotten by those in receipt of it. With some sound financial planning and advice, the issue of inheritance tax can be planned for effectively.
For expert inheritance tax advice, please feel free to contact me, Michael Coburn, using the contact details listed below:
Dublin 01 5267770
Wexford 053 9110380
Michael has been providing tax, investment and lifetime financial planning advice to clients since 2005. He has an in-depth understanding of Business Owners and their requirements, which allows him to guide his clients through the complex world of long-term financial planning.