Tax efficient succession planning
Significant changes in the Inheritance Tax Thresholds combined with the Increases in the CAT/Inheritance Tax rate mean many people are now concerned about the most tax efficient way to pass assets to the next generation.
In the most recent Budget, gift and inheritance tax rates (CAT) rose to 33%. In addition, the inheritance Tax threshold between parent & child now stands at €225,000. This is a reduction of almost 60% from a high of €542,544 in 2009 – to reflect falling asset values.
*In certain circumstances a parent taking an inheritance from a child can qualify for Group A threshold
If you pass on assets in excess of €225,000 to one of your children, they will be subject to an inheritance tax liability.
- Will they be able to afford to pay the tax liability within four months?
- An unpaid tax penalty of .0273% per day applies after four months have lapsed.
- On a tax liability of €500k this amounts to a penalty of €4,095 per month.
- Will they need to sell a property / assets to pay this bill?
- Will they be able to sell a property / assets in the current climate?
After years of accumulating your wealth you do not want to see it eroded by paying excessive amounts of tax simply by passing your assets to the next generation
With careful advance tax planning it is possible to minimise, or even eliminate, the amount of tax payable on the transfer of your assets to your loved ones.
Before you make any decisions with regard to estate planning you need to consider certain factors.
Firstly, you should consider gifting any asset which may have significantly fallen in value, for example, a property that was worth €500,000 at the height of the boom which may now be worth closer to €200,000, could be gifted to a son or daughter without any gift tax liability as it is below the threshold. Any future growth in the value of the property is in the name of the child and thus not liable for CAT. This also applies to any cash or investment assets.
To cover the cost of CAT and encourage people to plan for this, tax relief is available on certain life insurance plans. Where a life assurance policy is put in place to provide for the payment of CAT, Revenue will not seek to tax the policy proceeds. So, if there is going to be a significant tax liability for children when they inherit assets consider setting up a special section 72 life assurance policy which provides a lump sum to fund the CAT liability.
Dwelling House Exemption:
Another option is the Dwelling House Exemption which allows parents to pass a house to their son/daughter free of CAT once their son/daughter has lived there for at least a period of three years. At the time of the gift the child must not own any other house in Ireland or overseas and he/she must hold the property for a period of six years from the date of the gift.
For anyone who has a pension, they can use the tax advantages of Approved Retirement Funds (ARF) in their estate planning strategy. If the owner of an ARF leaves the ARF assets to a child who is 21 or over, there will be a once off Income tax liability of 30 per cent, the transfer is exempt from CAT.
There are many other reliefs such as Agricultural Relief or Business Relief which should be taken into consideration when implementing an estate planning strategy.
Why not speak to Declan Maher on 087 1444977 or at email@example.com to arrange a review of the assets that you have and consider your wishes in relation to passing these assets to the next generation.