Few taxes are as divisive and emotional as estate taxes. Consider the political uproar after a government-appointed tax commission last month proposed “substantially lowering the threshold” at which people start paying taxes on gifts or inheritances.
The Commission on Taxation and Welfare’s recommendation to cut the amount parents can leave their children tax-free was seen by advocates as a way to reduce inequality caused by intergenerational wealth transfer. However, critics saw this not only as a form of double taxation, but also as an attack on the so-called “mom and dad’s bank”; With house prices skyrocketing and rents shutting young people out of the housing market, many millennials’ only chance of climbing the real estate ladder is through inheritance.
Although the commission’s recommendation is long-term, Oonagh Casey Grehan, tax partner at Fagan & Partners, says it is an indication for families to take action on their estate planning sooner rather than later.
“If families are planning a gift or inheritance, I would plan for lower thresholds,” she says.
Even today, inheritance tax bills can run into the tens, sometimes hundreds of thousands. This can cause a major headache for the heirs and ultimately force the sale of the family home.
Paying a 33 percent Capital Acquisitions Tax (CAT) on an inheritance from a parent may seem like a rich person’s problem. Until you consider that the value of even a modest Dublin home can well exceed the €335,000 tax-free threshold. According to Daft.ie, the average list price for a home in the capital was €429,384 in the second quarter. Prices in South County Dublin are much higher – the Central Statistics Office says the median sale price for a home in Blackrock in July was €720,000. This means that anyone who inherits a house in Dublin from their parents is likely to be subject to tax.
The wealthy use the best accountants and estate planners to set up structures to pass wealth down to younger generations without triggering a large inheritance tax. But there are ways we can all potentially reduce an estate tax bill.
make a will
The biggest inheritance tax obstacle that Jonathan Ginnelly, tax director at Deloitte, encounters is people not making a will stating who should inherit their wealth. In fact, almost two-thirds of Irish adults have not made a will, according to a 2021 study by Royal London.
Spouses can transfer assets to each other tax-free, but if you die intestate, by law the spouse is entitled to two-thirds of the estate, with the remaining third divided among their children, who would then have to pay inheritance tax. Ginnelly suggests using writing a will as an opportunity to examine the value of your estate, see who might benefit, and consider how your beneficiaries would fund a tax bill.
“If you look at your kids and their status in life, maybe they don’t need an inheritance from you if they’ve done well, so maybe leave your fortune to their kids,” he says. “If you’re in your 80s and your child is in their 50s and has accumulated wealth of their own, there may be no point in leaving them if they have to pay taxes 33 percent above the tax-free threshold.”
If you live with someone but are not married and your partner dies, you may not be entitled to part of the estate. In a marriage or civil partnership, on the other hand, the surviving spouse or civil partner has a legal right to a share in the estate of a deceased spouse, regardless of what was stated in the will.
If your partner dies and the family home passes to you, you could face a significant tax bill—especially if you and your partner didn’t buy the home together. The maximum amount that one partner in a cohabitation can inherit tax-free from the other is €16,250. So they would have to pay 33 percent CAT on the rest, which would potentially mean selling the family home to pay the tax bill.
Note the exemption limits
When deciding how to pass on your wealth, consider your extended family thresholds and see how they fit your profile, Grehan recommends.
A €500,000 inheritance means a child would have to pay €54,450 in taxes if they had the full €335,000 threshold at their disposal, says Barry McCutcheon, Proposals Lead at Royal London. If you only have one child, they may have to sell the family home to pay an estate tax bill. If you have few children, depending on the value of your estate, you could pass on the family home tax-free by letting your children share it equally.
A close relative – such as grandparents, niece, nephew or siblings – can inherit only 32,500 euros tax-free, more distant relatives or friends even only 16,250 euros. But there are ways to use those bands to your advantage, Grehan says.
“People often make a will before their children get married or have children. If they do, update your will and see if it’s worth using the extended family line,” she says. “If you’re lucky enough to have an estate worth €2 million and have two married children with children of their own, your children could each take €335,000 tax-free, for a total of €670,000. If they each have three children, you can give up to €32,500 to each grandchild and up to €16,250 to your children’s partners.”
Take advantage of the home exemption
The housing shortage has forced many adult children to move back in with their parents. A parent with a child who has little prospect of ever being able to afford a home of their own may consider letting them own the family home and then using the homestead exemption to eliminate that child’s tax burden.
“When parents are planning what to do with the family home, they could see if there are any of their children who would likely be living with them if they die,” says Grehan.
The rules surrounding the exemption from housing have been tightened in recent years, making it more difficult for children to inherit houses tax-free. A child would therefore have to meet strict conditions to be entitled to this tax benefit. For example, to inherit the home tax-free under the tax exemption, your child must have lived in your home continuously for at least three years prior to your death and your home must have been your child’s sole residence during that time. You cannot own interests in other properties. In addition, the exemption can only be claimed for real estate that was the donor’s (donor’s) primary private residence at the time of death.
As a rule, the child has to live in the family home for six years after the inheritance. If this is not practical, the child can sell it and invest the proceeds to buy another home, but must spend all of the proceeds on that new home to avoid incurring CAT on the balance. There are further exceptions to the six-year rule if you are over 65 at the time of the inheritance or have to live elsewhere because of your employment or because of a proven mental or physical disability, such as a doctor.
However, if you have other children and they are upset at the prospect of only one child inheriting the family home, “we suggest giving that child a lifetime interest in the property where they can stay in the home for life, and a Giving a share in the property to the other children,” says Caitríona Gahan, a will and estate planning specialist at the law firm Lavelle Partners.
Make an annual gift
The small gift exemption allows you to send €3,000 per year to anyone without the recipient paying CAT. This means parents can give a child and that child’s spouse €3,000 each per year. That may not seem like a lot, but it can quickly add up to a down payment on a home.
For example, if a couple wanted to help a daughter set up a deposit, they could give her and her own family up to EUR 30,000 every year if she has three children.
According to David Quinn, CEO of Investwise, grandparents are increasingly using this mechanism to build up a deposit for their grandchildren.
“The average age of someone who inherits money is 60, so there’s a lot of planning now to skip a generation and give it away to grandkids who are trying to climb the wealth ladder,” he says.
Many wealthy parents and grandparents also take advantage of this exemption to extend lifetime loans to help a child or grandchild buy a home. While a loan would be taxable, they can use the small gift exemption to write off a portion of that loan each year.
Quinn says, “There are sophisticated programs based around lifetime loans where parents borrow money to pay for a house or a security deposit. But it has to be put together carefully.”
Use insurance to protect children from taxes
If you have a valuable estate, you can purchase section 72 life insurance to protect children from future estate tax bills. But do your homework beforehand as premiums can remain expensive, especially if you are older and in declining health when you buy the policy. The payout from this special life insurance policy – which is approved by the tax office – can then be used by a child to pay inheritance tax.
https://www.independent.ie/business/personal-finance/tax/six-ways-to-reduce-your-inheritance-tax-protecting-your-legacy-to-your-children-from-a-hefty-tax-bill-42048081.html Six ways to reduce your inheritance tax – Protect your inheritance to your children from a high tax burden