Passing your accumulated wealth to the next generation is something most people strive to do, however the views on whether the tax man should take a slice of the children’s inheritance can differ from person to person. Estate planning is a key element of a solid financial plan.
Some take the view that they have worked hard all of their lives to be able to pass something to the next generation and the last thing they want is the tax man taking a cut. These people will do everything allowable to reduce the tax take.
The other school of thought is that the kids/next generation did very little to accumulate this wealth and therefore they can deal with the tax.
Either way tax can have a serious impact on the value of your estate. The purpose of this paper is to give a general overview of some of the legitimate routes and schemes that can be used to reduce the overall tax liability when passing on assets. It is not a tax opinion and is not specific to you as an individual it is rather an exploration document for you to discover some of the ways that may or may not be of benefit to your particular circumstances.
Each of your children can inherit or receive gifts of €225,000 from you in their lifetime. The “ordinary costs” associated with raising a child are excluded from this Gift/Inheritance allowance. Anything above this amount is subject to tax at 33% even if the assets being received are not liquid.
Other groups of people such as siblings, grandchildren and nieces or nephews also have a threshold.
The passing of assets from husband to wife and vice versa is completely and legislation has also changed in recent years to take into consideration civil partners.
Any person can give any other person a gift of up to €3000 per annum, this means that a couple can give each of their children €6000 per annum. One ideal way of taking advantage of this is to take out a special type of savings plan which allows you to invest the money on a monthly basis and the child becomes the beneficial owner of the accumulated money at any point in the future without any affect on their threshold allowance.
If on the date of receipt your children do not own any other property anywhere in the world, they can inherit the home completely exempt of tax and without impacting their threshold. The purpose behind of this relief is to ensure no individual is left without a home.
It is however important to note that if there is any other property in the estate when the estate is being passed the Principal Private Residence Relief will not apply. One legitimate way to avoid this is to divide the property assets up so the child/children receiving the principal private residence does not receive any other property from the estate.
Passing on other property.
There is a relief available whereby if you as parents own a property and one of the children live in that property for more than 3 years this property can then be passed to that child without any gift or inheritance tax implications.
A perfect example of this is where somebody buys an apartment and then one of the children moves into it to attend college, after three years the apartment can be gifted to the child without any tax implications.
If you own land whether it is being farmed or not this can be passed to a child with generous tax relief attached to it provided the recipient passes the “farmer” test.
The “farmer” test isn’t as it sounds; it is not a test of the individual’s ability to farm but rather a financial test. Provided on the date of transfer the value of all of the recipients agricultural assets including the inheritance represent more than 80% of their total assets they will pass the test.
Where you own a business and you pass away provided several conditions are met the value of the business is reduced by 90% before calculating the taxable value of the business. Some of the requirements are stringent such as the need to hold on to the asset for 6 years into the future to avoid the relief being clawed back.
The purpose of this relief is to ensure the survival of a family business in the event of death of a parent.
ARFS/AMRFS (post retirement pensions)
Approved (Minimum) Retirement Funds paid to children over 21 are not subject to Capital Acquisitions tax but are subject to income tax but it is the opposite for children under 21.
This should be considered both in retirement but also pre-retirement as it may be beneficial to organise, that in the event of first death pension funds are invested in A(M)RF’s so on second death the children can benefit from the exemptions.
Section 72/60 policies
Section 72/60 policies are policies taken out from life companies that will pay out a lump sum in the event of death. Typically it pays out on second death, as the first death, where assets are being passed from one spouse to another are exempt from inheritance tax.
The payment is not subject to tax provided it is used to clear the inheritance tax bill. The recipients then receive the inheritance tax paid, avoiding the possible need to liquidate assets to clear down the tax bill.
These policies are used to “mop up” any exposures after all reliefs have been exhausted and need to be reviewed regularly to ensure that the lump sum to be paid out is not too great or falls short of the tax bill.
Inheritance tax planning should be completed by both a financial planner and a tax planner who have a thorough knowledge of your personal circumstances; this document is not a recommendation or should not be taken as advice.
At Prosperous Financial Planning we can design an inheritance plan specific to your needs. Our first consultation is free so there is no reason not to email us on firstname.lastname@example.org or call the number above to arrange an appointment.