It may not bring as much revenue to the government coffers, but inheritance tax is still a thorny political issue, and it will get thornier still, as property prices continue to rise during the ongoing pandemic.
Critics denounce the inheritance tax as a form of double taxation, while others argue that it helps reduce wealth inequality and improve public finances.
Indeed, the OECD recently championed higher inheritance taxes as a way to help pay for pandemic supports, so it remains to be seen whether the government will heed calls to raise tax-free thresholds.
By OECD standards, Ireland has a relatively progressive inheritance tax regime, although the threshold for children who inherit from parents is much higher than for those who are not direct descendants. The result is that wealthier families are much more likely to inherit than less well-off families.
Irish families can leave up to €335,000 to each of their children before they have to pay taxes. But that figure drops to €32,500 for other close relatives, and €16,250 for more distant relatives or friends.
The Government has defended this regime on the basis that, as the family home is the main element of assets, a lower threshold would force the children who inherit it from one of their parents to sell it to meet the tax obligation.
However, relentless house price inflation has meant that an increasing number of families, especially in Dublin, are facing large Capital Acquisitions Tax (CAT) bills because the homes they inherit, even modest homes , are worth much more than the tax-free threshold of €335,000.
The latest figures from the CSO show that households paid a median or median price of €265,000 for a home in the Republic over the past year, while in Dublin the median price was €390,000.
In 2009, the tax-free threshold was just over €540,000. Iin 2015It dropped to €225,000 and has slowly climbed back up ever since.
There is no doubt that more people have found themselves in the net of estate and gift tax. Revenue figures show that 16,000 people paid €522 million in 2019, more than double the amount paid by almost 11,000 people in 2010.
So what are ways to avoid or reduce gift or estate taxes that are due on any assets you pass on in the event of your death?
Small Gift Exemption
It is well known that you can inherit a total of up to €335,000 from a parent over your lifetime without paying any tax on it, and that any amount above this threshold is subject to CAT at 33pc. Similarly, you can inherit up to €32,500 tax-free from a close relative, such as grandparents, an aunt or uncle, or a brother or sister, and up to €16,250 from someone who is not related by blood.
What is less known is that you can give up to €3,000 a year to anyone without having to pay CAT. Known as the small gift exemption, it also means that gifts of less than €3,000 a year will not count towards the total inheritance a person could receive before reaching the tax-free threshold from parent to child.
For example, a couple could give their daughter and her family up to €30,000 each year if they have three children (€3,000 from each parent for the daughter, son-in-law and three children).
“This is the easiest way to manage gifts and inheritances if you have the foresight and wherewithal to do so,” says Marian Ryan, consumer tax manager at Taxback.com.
“Where we commonly see it is in parents, grandparents and godparents who will purchase award bonds or savings bonds in the child’s name in small amounts consistently throughout the child’s life, which can add up to a substantial amount when they reach the 18 or 21 years old. – but because they amounted to less than €3K a year, it is below the threshold, so no tax is due.
“Outside of this, I think the small gift exemption is underutilized.”
It is also worth bearing in mind that the gift does not have to be in cash either, as long as its value is less than €3,000; they can be jewelry, cars, stocks, for example.
This is one of a number of exemptions that could be claimed from the capital acquisitions tax, but it would involve a small lifestyle change. It’s also more restrictive than it used to be, since the rules were tightened in 2016.
Under this relief, if a child lives in the family home for the three years prior to the gift or inheritance (and has no other assets), the parent can gift it to them tax-free, as long as the child stays in the property for six years. after delivery and owns no other property at that time.
A couple of exemptions to the six-year rule are if you’re over 65 when you inherit the property, or if you have to live somewhere else because of your job or because of a mental or physical disability.
If you are married or in a civil union and you die before your spouse, they will not pay any tax on capital acquisitions in any gift you pass them. So this is a bit of an extreme move, but if you want to pass on your assets to someone who is not a member of your family or her partner, you could legally marry that person.
“We’ve heard, anecdotally, of single people getting married or getting married so they can leave an inheritance to their life partner or a good friend to avoid the big tax bill associated with that,” Ryan said.
In fact, much coverage was given to the case of two straight friends, Michael O’Sullivan and Matt Murphy, who married in 2017 to avoid the €50,000 inheritance tax on the house that Murphy intended to leave to O’Sullivan in his will. .
The most common thing for non-blood relatives who want to gift something or leave an inheritance to someone is to take advantage of the small gift exemption over a long period of time, if they have the foresight, says Ryan.
Pull out a Section 72
There are insurance policies you can take out that will cover the CAT tax bill that could apply to anyone who is gifting a large inheritance.
Known as a Section 72 policy, the relief is approved by Revenue to allow people to cover the cost of death taxes.
It is structured like a lifetime policy, but it is expensive. If a child receiving an inheritance faces a tax exposure of €66,000 from inheriting a house worth €535,000, the monthly cost of taking out a Section 72 policy of €66,000 with Royal London (for a non smoker, 50 years old) would be €93 a month, according to Joey Sheahan of MyMortgages.ie.
Another problem is that the policy must be paid, without interruption, for at least eight years before the income is exempt from gift tax.
It could be something the children are asked to cover, since it will help them avoid taxes when they inherit.
How to benefit from the small donations exemption tax relief
The small gift exemption sounds like a valuable tax break, so why isn’t it more popular?
When it comes to inheritance tax, most financial advisors will be quick to recommend that everyone should take advantage of the small gift exemption.
Through this tax relief you can give up to €3,000 a year to anyone, without having to pay the CAT (tax on property acquisitions), and that does not count towards the recipient’s total accumulated lifetime inheritance tax-free threshold.
But it’s still something of an underused tax break, as it may have some real-world and practical problems that prevent it from being used more widely.
The first potential issue is liquidity, as your assets may be tied to pensions or property, meaning you can’t convert them to cash easily or quickly, but if you have instant access to your funds, then it’s certainly a great option.
Are there limits that affect how the small gifts exemption works?
You can gift as many €3,000 shards to any number of people, each year. For example, a child could get €18,000 tax-free each year from four grandparents and two parents.
There is no limit on how much a person can receive in any tax year under the exemption, except that no more than €3,000 can come from any one person. There is also no upper limit on the number of times you can use the exemption, and it does not matter if your children are under or over 18 years old.
Are there a lot of forms to fill out or hoops to jump through to claim small gift exemption?
blowing up the Small gift full exemption for their children would require considerable intergenerational coordination and some gentle ‘reminders’, which could get awkward. After all, no one likes to ask for money.
There are some savings plan products that are specifically designed around the small gift exemption that may be worth checking out, such as those from Irish Life or Standard Life.
It is also worth bearing in mind that the gift does not have to be in cash either, as long as it is worth less than €3,000; they can be jewelry, cars or stocks, for example. Of course, if any individual item has a value greater than €3,000, the balance of the value above this amount may reduce the beneficiary’s lifetime inheritance tax-free threshold.
Can the Can the Small Gift Exemption tax relief be used to help your children buy a home?
If you wanted to give one of your children a substantial loan, such as helping them buy a property, you would have to charge an interest rate based on what the market charges for personal loans to avoid being classified as a gift for tax purposes.
But you could also use the exemption to offset the interest bill. For example, if you lent your child €15,000 at a market rate of 10pc, that would result in an annual interest bill of €1,500 that you could discount with this relief, leaving you with €1,500 remaining within the exemption for this year.R.