Talking about money can be a challenge for families but it is important to discuss what is being passed on and to whom. Without discussion and planning, there is the possibility for the forced disposal of assets to settle any potential tax liabilities or conceivable family conflict …
When transferring a single residential property to a child, Capital Acquisitions Tax (CAT) rates apply over and above the relevant tax-free threshold. The current parent-to-child tax-free threshold is €335,000 but bear in mind that this could change and is something we keenly watch for adjustments every year at Budget time. The general trend in recent years has been downward, for example, in 2009 the CAT threshold for children was €542,544.
To give an example:
Say you inherit a residential property that is valued at €1,000,000. You are entitled to reduce this amount by €335,000 but you must pay 33% CAT on the remaining amount which is €665,000 and depending on when the property is inherited there may be a small window of time in which to pay the tax due. This inheritance gives you a tax bill of €219,450. The inheritance may in effect cause a short term cashflow problem that disponers or beneficiaries have overlooked. Some beneficiaries may not wish to sell the property for personal reasons, or the market conditions for property might be far from ideal. There are some options that can help you avoid this potentially large cashflow problem.
Succession planning might involve having conversations that are very uncomfortable but it’s worth talking openly with your parents to understand their plans and consider ways to prepare yourself for a potentially large tax bill to maximise the benefit of the gift or inheritance.
Section 73 Savings Plan – Funding the Tax Liability on a gift
One way of preparing for gift and ultimately inheritance tax is to use the proceeds of a Section 73 saving plan. Such policies can offer the option of paying a beneficiary’s CAT bill on a gift, without the payment itself being considered a further taxable benefit. These savings plans need to be for a minimum of eight years in duration and if the owner of the Section 73 Savings plan dies within an eight-year period, the value of the plan will not qualify to be used against either gift or inheritance tax.
A property gift made alongside a Section 73 policy provides the child with a property and a means to fund the gift tax liability, i.e., that tax bill is paid for in a tax efficient way. Importantly, future capital appreciation on the property will accrue to the child, for whom no charge to CAT will arise. This can work especially well when the asset being gifted does not attract a CGT liability for the parent transferring the asset and where the Stamp Duty liability may also be minimal.
Section 72 – Using a Life Assurance Policy
A Section 72 life insurance plan is a policy to tax efficiently cover the inheritance tax bills of the beneficiaries of an estate. Put simply, it allows the beneficiaries to inherit assets without then having to find the money to pay a significant tax liability. If the beneficiary does not want to sell assets to pay their tax bill or can’t do so quickly, it may be a useful option.
Dwelling House Exemption
You may have heard of the Dwelling House Exemption regarding the gift or inheritance of a residential property, but most people will not qualify for this relief as the conditions to meet in order to avail of the relief can be difficult to satisfy. In the case of an inheritance, amongst other conditions, the beneficiary must not at the date of the gift or inheritance own any other dwelling house or hold an interest in any other dwelling house in Ireland or abroad. The beneficiary also needs to have occupied the property as their main residence throughout the three years immediately preceding the date of the inheritance.
Succession planning: communication is key
Succession planning might involve having conversations that are very uncomfortable but it’s worth talking openly with your parents to understand their plans and consider ways to prepare yourself for a potentially large tax bill to maximise the benefit of the gift or inheritance. These talks are worth having now to avoid future confusion or erosion of property wealth.
The property transfer options listed above are not exhaustive, be sure to talk to an advisor to discuss your situation. Understanding and careful planning will build better financial outcomes for all beneficiaries.