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 or not 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.
Each of your children can inherit or receive gifts of €310,000 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.
The move up from €225,000 to €280,000 and then subsequently to €310,000 is welcome but still a long way off the €500,000 allowance we had back pre-boom. But as house prices and more people fall into this bracket this is an easy vote getter for government. The tax take on inheritance tax is about €350 million per annum
Other groups of people such as siblings, grandchildren and nieces or nephews also have a threshold. So linear relatives, for examples brothers and sisters, nieces and nephews can give each other €32,500 in their lifetime, whereas as gifts from other so called “strangers” the limit becomes €16,250
The passing of assets from husband to wife and vice versa is completely exempt.
Interestingly on Christmas Eve 2014 revenue issued a briefing outlining what they believe to be the “ordinary costs” of raising a child. Food and clothes as you would expect are allowable, putting them through college is also allowable but revenue said paying for a wedding was not allowable. They did however clarify this and a reasonable contribution to a wedding is fine but not an extravagant contribution towards a hugely expensive affair.
That same briefing also outlined another no, no, that caught many people by surprise. Giving a son or daughter a contribution or the deposit for a house is not allowable and would reduce their threshold allowance.
What can you do?
Given that house prices are on the rise again and investments have had a great run over the last 6 years many people are in this bracket without realising it. People need to be mindful of what they can do and take full advantage of any allowances or reliefs.
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 effect on their threshold allowance.
For example if you pay €6000 per annum for ten years and the fund grows to €60,000, lets ignore growth, this €60,000 does not come out of the €310,000 gift tax allowance.
Most of our clients choose to pay this as a monthly contribution of €500 per month i.e €250 from each parent. The allowance is a calendar year allowance so it is important to ensure you get the allowance used up in a given year.
These savings plans are set up slightly differently to other plans and it is important they are set up- correctly but other than that they have the same investment options etc than any other long-term savings plan has.
If on the date of receipt your children do not own any other property anywhere in the world, they can inherit the family home completely exempt of tax and without impacting their threshold, provided the home qualifies as their private dwelling home at the time of the gift/inheritance. The purpose behind this relief is to ensure no individual is left homeless because they had to pay a tax bill.
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.
If you own land this can be passed to a child with generous tax relief attached to it provided the recipient passes the “farmer” test.
The main provision of the test states that 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 asset test.
Legislation introduced in the 2014 finance act went a little further on these requirements. The idea being to ensure the land was actually farmed. So now you not only have to pass the asset test but either you or the person you decide to lease the land to must also qualify as an “active farmer”
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. Like a lot of these reliefs you will need to hold the asset for a period of 6 years to avoid a claw back.
The purpose of this relief is to ensure the survival of a business in the event of death of a parent. The last thing revenue want is tax paying jobs being lost because of a tax bill.
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 policies
Section 72 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.
Marry your mate
Given the fact that passing assets between spouses is tax exempt it is now technically possible to marry your mate for tax reasons. If you decide to and you give them assets they won’t be subject to tax.
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