Wills, Trusts and Inheritance Tax[soundcloud id=213485469]
Wills, trusts and inheritance tax – What is inheritance tax?
If you receive a gift during a person’s lifetime of some form of benefit and you don’t pay for it or you don’t pay for it fully, you may be liable to pay Gift Tax. By the same token, if you receive an inheritance following a death, you as a beneficiary of that inheritance may be liable to Inheritance Tax. An inheritance can include cash, monies in bank accounts, life assurance policies, stocks, shares, property such as the family home, land, livestock, jewellery and cars. The logic behind it was that you are getting “something for nothing” and therefore you should be taxed. Both these taxes are types of Capital Acquisitions Tax.
The tax applies to all property that is located in Ireland. It also applies where the property is not located in Ireland but either the person giving the benefit or the person receiving it are resident or ordinarily resident in Ireland for tax purposes.
How much inheritance tax will I be liable to pay?
Gifts and inheritances can be received tax-free up to a certain amount. The tax-free amount, or threshold, varies depending on your relationship to the person giving the benefit.
There are three different categories or groups and each has a threshold that applies to the total benefits you have received in that category since 5 December 1991.
In 2009 the threshold was €542,544 at 22% this was intended to come into effect when the inheritance was at a high level.
However on 6th November 2012 the rate was drastically increased to 33% and the threshold was slashed.
Group A: The threshold is €225,000. This applies where the beneficiary is a child of the deceased inclusive of stepchildren, adopted children and foster children
Group B: The threshold is €30.150. This applies where the beneficiary is a parent, grandparent, grandchild or great- grandchild, sibling or nephew or niece.
Group C: The threshold is €15,075. This applies to any relationship not included in Group A or Group B.
The threshold is a one off for each group to use during your lifetime. All prior gifts and inheritance taken since 5th December 1991 will accumulate and eat into your threshold for each group.
If for example a parent died on 4th April 2014 and left €200,000 to one of their children (Group A Inheritance) and that child had already received a gift from that parent during their lifetime of €50,000 (Group A Gift) the current inheritance and the prior gift will be added together €250,000 which means that the child has used all of their tax free threshold. However, if the child had received a prior gift from an uncle of €10,000 (Group C Gift) this would not be counted as it does not eat into the Group A threshold it would only be taken into account if the child receives further inheritance or gifts from another person who falls into Group C.
What exactly is succession planning?
Estate planning is planning the transfer of assets to the intended beneficiaries in the most tax efficient way and in the most personally acceptable manner.
While making a Will is certainly the first step in planning ahead there are other issues to consider depending on your own particular circumstances.
In certain circumstances it might be appropriate to make gifts to the beneficiaries during your lifetime. For instance, you may wish to transfer your business or farm to one of your children who are working in the business or on the farm. Or, you may want to give your children a benefit now as they start out in their adult lives to help get them set up.
It is always vital to remember that you take measures and retain enough assets to maintain yourself for your lifetime, such as a nest egg for nursing home care or retaining a right of residence in the family home on the transfer the ownership.
What reliefs from Inheritance Tax can be availed of when contemplating how to dispose of your assets in a will?
- Dwelling House Relief provides for a 100% exemption and it is not based on relationship between the person giving the benefit and person receiving the benefit.
- Agricultural Relief provides 90% relief from Inheritance tax and it is not based on the relationship between the person giving the benefit and person receiving the benefit.
- Business Relief provides a 90% relief and it is not based on relationship between the person giving the benefit and person receiving the benefit.
- Favourite Nephew/Niece Relief is based on relationship between the person giving the benefit and person receiving the benefit it is a relief whereby a qualifying niece/nephew moves from their Group B to Group A.
- Insurance Pay out: There are specific types of life insurance policies which parents can take out to cover the tax bill which their children would otherwise face when they receive a gift or inheritance.
Are there any exemptions from Inheritance tax?
- Gifts or inheritances from a spouse or civil partner
- Payments for damages or compensation
- Payments for support, maintenance and education of members of the family which are part of normal expenditure
- Benefits used only for the medical expenses of a person who is permanently incapacitated due to physical or mental illness.
- Benefits taken for charitable purposes or received from a charity
- Winnings from a lottery, sweepstake, game, or betting
- Retirement benefits and pension and redundancy payments are not usually liable to Gift Tax
- The first €3,000 of the total value of all gifts received from one person in any calendar year is exempt. This does not apply to inheritances.
What is a discretionary trust?
Trusts are a very useful mechanism to make provision for minors or incapacitated persons. They defer the vesting of assets in an intended beneficiary and ensure that that beneficiary is properly provided for by persons of your choice. While inheritance tax doesn’t apply, Discretionary Trust Tax imposes an initial levy of 6% on the market value of the trust fund. However, the legislation provides for a refund of 50% of the initial levy if the trust is wound up and all of the trust assets are appointed absolutely to beneficiaries within five years. In addition to the initial levy, an annual levy is charged on the value of assets comprised in a chargeable discretionary trust on 31 December in each year. An exemption from discretionary trust tax arises if the trust is set up exclusively for the benefit of a named individual or named individuals who is or are, because of age or improvidence, or physical or mental or legal incapacity, incapable of managing his, her or their affairs.