Our client Maura*’s husband passed away recently, and she has one daughter, Kathleen. Maura’s husband’s entire estate, including their residential property worth €1,000,000, passed to her upon his death. We spoke to Maura about her inheritance and how best to organise it in the interests of herself and her daughter.
When Maura’s husband passed away it was relatively unexpected given that he was in his early seventies and in good health. Maura, as his spouse, inherited his entire estate. After her husband died, she updated her will to reflect her wish that her property pass to her only child, Kathleen.
At the time that Maura was updating her will, the parent-to-child tax-free threshold was €335,000 but Maura was conscious that this amount could be lowered by the Government in coming years. From 1 January 2009 to 7 April 2009, the threshold was as high as €542,544 but it had declined from this value since then with only very modest increases to its lowest level of €225,000 from late 2015 onwards.
Maura’s solicitor made her aware that Kathleen would be facing a large tax bill upon Maura’s death in respect of the property. Under the tax-free threshold Kathleen would be entitled to €335,000 but she would have to pay 33% Capital Acquisition Tax (CAT) on the remaining amount of €665,000. Beneficiaries may need to pay their CAT bill within the same tax year that they inherit, which could leave Kathleen in the position of having a very small amount of time to pay a tax bill of approximately €219,000. Maura was very keen not to put her daughter in this situation and spoke to Goodbody about the options available.
At first, Maura considered the Dwelling House Exemption, but the conditions for the exemption were not possible to satisfy. Under the exemption Kathleen would only be able to inherit the property without incurring tax if she did not own or hold an interest in any other residential property in Ireland or abroad. Kathleen already owned a house with her husband. She would also need to occupy her parent’s property as her main residence for three years immediately preceding the date of her inheritance. Kathleen might have considered selling her house and moving in with her mother, but this was not practical. Kathleen had four children and there wasn’t enough room in Maura’s house for the whole family.
Maura considered other options including a Section 73 savings plan and a Section 72 life insurance policy. Both options have the purpose of reducing the burden of the CAT bill that the beneficiary must pay.
A Section 72 life insurance policy is designed to tax efficiently cover the inheritance tax bill of the beneficiary of an estate. Put simply, it allows the beneficiary to inherit assets without then having to find the money to pay a significant tax liability. If Kathleen did not want to sell any assets to pay her tax bill, or couldn’t do it quickly, it might be a useful option. Maura would have to obtain a Section 72 life insurance policy to the value of the tax bill that she is willing to cover for Kathleen.
Alternatively, Maura could start a Section 73 savings plan which offers the option of paying a beneficiary’s CAT bill on a gift, without the payment itself being considered a further taxable benefit. The savings plan needs to be in place for a minimum of eight years in duration. The proceeds of the plan must be used to pay gift tax within one year of the proceeds being paid.
Maura was retired and in her mid-60s, so she decided to start a Section 73 savings plan. This was to provide that Kathleen’s tax bill would be paid as tax-efficiently as possible. Kathleen would also then be able to benefit from the future capital appreciation on the property without having to pay a large tax bill at the time of her mother’s death.
Maura had an open conversation with Kathleen about her intentions, which while difficult, was very reassuring to Kathleen. Both agreed that having the conversation now ensured that Kathleen faced an easier process at a later emotionally difficult time.
*Names have been changed to protect client anonymity.