By Damian Wilson
“In this world nothing can be said to be certain, except for death and taxes”– Benjamin Franklin
In Ireland, we suffer from one of the highest Capital Acquisition Tax (CAT) rates in the world. CAT is a tax charged on individuals who have inherited or received as a gift, any benefits in their lifetime, over certain limits.
As property values decreased through the recent recession, the limits and CAT rates have dramatically changed, in order to bring more gifts and inheritance into the tax bracket. For example, in 2008, a child could inherit €542,544 from a parent, and the balance was taxed at 20%. However, now a child can inherit up to only €225,000 from a parent, with the balance now taxed at 33%.
Although recent suggestions are that the Government will increase the relevant thresholds as property prices increase, there are many changes you can make or reliefs available to reduce the amount of tax due, if any at all.
Who and what is taxable?
A CAT liability may apply where:
- The beneficiary is Irish resident
- The disponer (person gifting or leaving a benefit) is Irish resident
- The gift or inheritance consists of Irish property e.g. Irish property or land
The below thresholds set out the limits on all gifts and inheritances received since 5th December 1991, where CAT becomes payable at 33%.
Example
- Mary received a taxable gift from her Father in 2005 €20,000
- Upon the death of her Father she inherits the following:
- Cash €50,000
- Family Home €250,000
- Total benefits received €320,000
- Relevant Group A Threshold (€280,000)
- Taxable Amount €40,000
- CAT Due @ 33% €13,200
Main Exemptions & Reliefs
Spouses Relief – Any inheritance or gifts made between spouses are 100% exempt from CAT
Annual Gift Exemption – You can gift anybody €3,000 per year free of CAT. This exemption is per person gifting i.e., both you and your spouse can gift your child €3,000 each per year free of CAT, without affecting their thresholds. This does NOT apply to an inheritance.
Inheritance from a child – Any Inheritance received from a deceased child which had been given to the child as a gift by the parent could be exempt
Family Home – A family home, could be left tax free provided the following conditions are met:
- It is the principal private residence of the recipient.
- The house is owned by the disponer during the 3 years prior to the gift.
- The recipient had been living in the home for the three years immediately preceding the transfer.
- The recipient does not have an interest in any other residential property.
Agricultural Relief – The taxable value on the transfer of any agricultural property can be reduced by 90% once certain conditions are met. Two of the main conditions are:
- The gift or inheritance must be agricultural property
- The recipient must qualify to be treated as a “farmer”.
Business Relief – The taxable value on the transfer of a business can be reduced by 90% once certain conditions are met.
When and how should this be declared to Revenue?
Remember, the responsibility is always on the recipient to calculate, declare and pay over any due taxes. They must file a tax return if the total value of gifts and inheritances received in one of the groups, A, B or C, since 5 December 1991 is more than 80% of the tax-free threshold for the relevant groups
- If you receive or inherit as a gift a benefit between 1st January and 31st August, you must complete the tax return and pay any tax due on or before 31st October in that same year
- If you receive or inherit as a gift a benefit between 1st September and 31st December you must complete the tax return and pay any tax due on or before 31st October in the following year.
Failure to pay and file on time could result in surcharges of up to 10% of the tax due.
For some people effective financial planning could reduce or eliminate a tax liability. There is only one thing worse than having to pay tax you can’t avoid, and that is paying tax which could have been avoided.
Section 72 Policy
If you effect a Section 72 Life Assurance policy, the proceeds of this policy, which are exempt from CAT, can be used to pay a CAT liability. These policies are more expensive than mainstream life policies but maybe a good option once weighed up against a potential CAT liability, which may avoid a family member having to borrow or sell before they could afford their CAT bill.
Tips:
- Explore the available Exemptions and Reliefs to see if they apply to you
- Evaluate if a Section 72 policy would make financial sense for you
- Commence gifting €3,000 per annum to your children now
- Where a gift will result in a tax liability, time this gift to allow for optimum time before tax is due, e.g., gift in September.
- Get professional advice