Inheritance tax is something that you may not want to consider, but advanced planning is wise. It’s tempting to put inheritance tax on the long finger, as you might a will.
However, there are elements to inheritance tax that should be given consideration.
Of course, it can be a difficult conversation to start with loved-ones, especially if you have valuable assets to pass on to future generations.
Marc Westlake, managing director of Everlake, says that people often think that estate planning is only relevant towards the end of their life.
However, a robust estate plan should start much earlier, when you can plan tax efficiently and when your beneficiaries are likely to need their inheritance.
“The most obvious way to be tax-efficient is to make full use of the capital acquisitions tax (CAT), also known as inheritance-tax thresholds,” Mr Westlake says. “These are lifetime limits that allow individuals to receive a gift or inheritance tax-free.”
The limits are dependent on the relationship between the giver and beneficiary and are set out on Revenue.ie.
In Ireland, inheritance between a spouse or civil partners on death is tax-free, with no limits.
However, people should ensure their assets are in order to avoid any non-Irish tax liabilities and to avoid any break in income for the surviving spouse, Mr Westlake says.
In the case of farms or family businesses, there are tax reliefs to assist with passing these on to the next generation.
These reliefs allow the asset to stay within the family without the heirs receiving a punitive tax bill. Business relief and agricultural relief can reduce the taxable value of assets by up to 90%.
“Establishing a family partnership or family trust is an excellent option for large or more complex estates,” Mr Westlake says.
“These can be used to manage the assets, control how and when the beneficiaries receive them, and assist with spreading out tax liabilities over a period of time. Loans to children are also extremely helpful, as they can be forgiven over time and allow some breathing space to parents who are not 100% sure they are wealthy enough to give away their financial assets too early.
“Rather than restricting your estate to your children, if you have a number of assets, such as savings, investments, jewellery, investment properties or holiday homes, consider passing on some of those assets to your extended family, such as grandchildren and in-laws.
“This approach will allow you to make the most of the available CAT thresholds, protect the value of the assets in your estate, and reduce or eliminate the inheritance tax bill that would otherwise be faced by your children.”
Mr Westlake also says to make the most of the small gift tax exemption, which allows anyone to receive cash or assets to the value of €3,000 per year from any individual and tax-free.
“As with all financial plans, your estate plan should be regularly reviewed,” Mr Westlake says. “Tax thresholds and rules can change, so it’s important that your plans are up to date and continue to work for you.”
Glenn Gaughran, head of business development with the Independent Trustee Company, says that a pension pot could be worth hundreds of thousands or even millions, and a pension could be one of the most valuable assets that people have to pass onto their loved-ones.
“However, like any element of an inheritance pot, where possible, it is important to limit the tax bill that could be faced by those you pass your pension onto,” Mr Gaughran says. “This is particularly important if you decide to opt for an approved retirement fund (ARF) when you retire.”
An ARF is a personal retirement fund, whereby you can keep the money in your pension pot invested after retirement and from which you can withdraw regularly so you have an income during your retirement.
“If you opt for an ARF, you should carefully consider whether you should leave your ARF to your spouse alone, rather than to both your spouse and children,” Mr Gaughran says.
“The most tax-efficient way to pass on an ARF is for it to transfer into an ARF in the name of a spouse or civil partner. Neither inheritance tax nor income tax are triggered for the spouse or civil partner in this instance, though the spouse or partner will pay income tax on any drawdowns from the ARF.”
If some or all of an ARF is to be left to a child, the tax treatment varies, depending on the age of the child, Mr Gaughran says.
“ARF benefits payable to a child under the age of 21 may be subject to inheritance tax, though no income tax will be due.
“ARF benefits payable to a child over the age of 21 are subject to income tax at a rate of 30%.
“However, inheritance tax is not payable.”
