How to avoid gift and inheritance tax?

What is gift and inheritance tax?

Inheritance Tax is a form of tax paid by the person who inherits an estate after the owner’s death. Gift tax arises where a person receives a gift with a monetary value above certain tax free thresholds. Capital Acquisitions Tax (CAT) is a term used to refer to gift or inheritance tax. If you are going to receive a gift or inheritance, then some financial planning can help reduce the related tax bill.

Your estate or gift can include:

- Cash in your bank account

- Property, Land, buildings, company, business, farm, intangible assets

- Shares, investments, funds, pension, insurance policies

- Other possessions such as jewellery, furniture, art, cars & machinery, clothes

In Ireland, the CAT rate is set at 33% on gifts and inheritances. It is the receiver who pays CAT. There are tax free thresholds allowed for both gifts and inheritances depending on your relationship to the disponer. The tax free thresholds are cumulative life time reliefs, so once they are exceeded, you are liable to CAT on any further gifts and inheritances under each group threshold.

CAT is applied to the three following categories :

Group Threshold A - On any amount above €335,000, where the beneficiary is the child or the parent of the deceased

Group Threshold B - On any amount above €32,500, where the beneficiary is the sibling, nephew or niece of the deceased

Group Threshold C - On any amount above €16,250 where the beneficiary is a relative or a non-relative of the deceased

How to avoid gift and inheritance tax?

Spousal transfers

There is no CAT on gifts or inheritances from a spouse or a civil partner. Any assets passed under a court order for divorce or separation are also tax free.

Tax Free Threshold

Avoid inheritance tax by keeping the value below the tax free threshold.

Annual Small Gifts Exemption

Gifts below €3,000 are exempt from tax, this exemption allows every person to gift €3,000 per annum to another person without the recipient incurring any gift tax. This relief is often used by parents and grandparents to gift children or grandchildren €6,000 each year (€3000 from each parent or grandparent). Note that if someone gives you a gift and then passes away within two years, it is then considered to be an inheritance and the Small Gift Exemption doesn’t apply.

Dwelling House relief

If any of the following factors apply, you are exempted from inheritance tax (CAT) on a house that you inherit:

· The house was the sole or main home of the person who died.

· For the three years before the person’s death, you lived in that house as your main home.

· You do not buy, possess or share an interest in any other property, even one you have inherited as part of the same inheritance.

· After you receive the inheritance, the house will remain your primary home for six years. (If you are over 65, this does not apply.)

Offset CAT against CGT on same event

When Capital Gains Tax (CGT) and CAT arise on the same taxable transaction and property, you may be entitled to a tax credit for the CGT you have paid as a credit against the CAT. The CAT payable by the beneficiary can be more or less than the CGT paid by the disponer. If you have received a gift or inheritance on or after 21 February 2006, and you sell it within two years, the credit will be clawed back. This relief is often used on transfers of property between family members.

Gifts to Charity

Gifts to charities, trusts and national organisations are usually exempt from tax

Business Property Relief

Business Relief reduces the taxable value of the business property by 90%, subject to conditions.

If you inherit or receive a gift of business property, you may qualify for Business Relief.

Agricultural Relief

If you inherit or receive a gift of agricultural property, you may qualify for Agricultural Relief. This relief reduces the taxable value of the property, including land, by 90%.

Favourite Niece or Nephew Relief

If a favourite Nephew or Niece receives a gift or inheritance of a business asset, subject to conditions, this relief allows exemption of CAT under Group A threshold.

Maintenance of an incapacitated person

Gifts or inheritances taken exclusively for the purpose of discharging “qualifying” expenses of an individual who is permanently incapacitated by reason of physical or mental infirmity are not subject to CAT. The Revenue Commissioners must be satisfied that the gift or inheritance has been or will be applied to such purpose and the expenses that qualify are those relating to medical care and upkeep of the person including the cost of maintenance in connection with such medical care.

Payments to Children

Payments to your children to support their education (until they turn 18, or 25 while in full time education)

and payments you make to support your child with a disability are exempt from CAT

If you are about to receive a gift or inheritance, it is worth exploring if there are ways to structure it so that you reduce or avoid Gift and Inheritance tax. Call us for a consultation.