The use of trusts may be beneficial in deferring tax liabilities. Assets may rest in a trust with no individual having a beneficial interest therein. However there are significant once-off and annual tax charges relating to trusts which may erode the tax saving benefit.
The use of trusts is a complex matter for both tax and legal reasons. We can provide tax advice on such matters by way of consultation for which a separate charge will arise.
There is a special relief where the benefit obtained consists of certain business assets e.g. shares in a family trading company or taking over a business previously carried on by parents in their own names.
This is a very valuable relief and the market value of the benefit received is reduced to 10% of its true value for inheritance and gift tax purposes.
The intention of the relief is to allow for the transfer of businesses within families without incurring major tax liabilities. Needless to say there are numerous rules and regulations for dealing with this relief.
Agricultural Property
A similar relief to the business relief explained above is available in respect of agricultural property. The market value of qualifying agricultural property is reduced to 10% of its true value when calculating inheritance or gift tax liabilities.
Favourite Nephew or Niece Relief
Where an individual leaves a business or farm to a nephew or niece who has worked substantially on a full time basis for a period of five years up to the date of the gift or inheritance in running the business then the relevant class threshold between them will be treated as a parent/child situation. This means the tax-free threshold will increase to €280,000.
This tax needs to be borne in mind if property is intended to be passed on within the family. There is no tax due on transfers between spouses. However, tax is payable on transfers to children where the value of all benefits obtained since 4th December 1991 exceeds €280,000.
Bearing in mind property values it would not be difficult to exceed this threshold. For lifetime transfers capital gains tax may also arise on the transfer of a property to a child. However, only the greater of the two taxes is payable.
Different approaches have evolved over the years in finding methods of reducing the level of tax payable and also to provide funding for whatever tax is payable.
Acquiring properties in the names of children can help avoid tax on future transfers to them. The use of Trusts can also have a role to play in this area particularly where substantial tax liabilities may be involved.
Advice in advance is the only way to plan for this particular tax combined with the use of life assurance products to provide funds to pay whatever tax liability may arise.
Lifetime Transfers to Children
As already mentioned a lifetime transfer of a property to a child may give rise to Capital Gains Tax, Gift Tax and Stamp Duty. It may be possible to offset the Capital Gains Tax against the Gift Tax so that only the greater of the two taxes is payable.
However, the benefit of a lifetime transfer is to ensure that all future increases in value arise for the child and will not be part of your estate for inheritance tax purposes so that a tax saving is obtained in the future.
This relief is of particular importance for parents transferring properties to their children, which they will use as their private residence. The relief also arises where elderly siblings are living together sharing a private residence and one of them dies leaving their interest in the property to the survivor. A brief summary of the rules applying is as follows:
This is a very good relief and of great benefit for planning ways to reduce inheritance tax liabilities.
Gift and inheritance tax (capital acquisitions tax) is dealt with under the self assessment tax system and the obligation is on you to ensure that proper returns are made in time and whatever tax due is paid to the Revenue by the due date.
Tax is due and a capital acquisitions tax (‘CAT’) return must be filed by –
– on or before 31 October, if the valuation date falls between 1 January and 31 August in the same year, or
– on or before 31 October of the following year, if the valuation date falls between 1 September and 31 December in the previous year.
There is a requirement to file a CAT return where the total value of gifts / inheritances received since 5 December 1991 is in excess of 80% of the relevant tax free group threshold.
Step 1- List out all your assets and their estimated value. Deduct any mortgages or liabilities from the value of the assets.
Step 2- Decide who you would like to leave your assets to. Remember as a short term measure assets left to your spouse are completely free of tax.
Step 3- Examine the special tax reliefs available for certain assets e.g. residential property, business assets and agricultural property.
We can give more advice on this matter by way of consultation for which an extra charge will arise.
Step 1- List out all your assets and their estimated value. Deduct any mortgages or liabilities from the value of the assets.
Step 2- Decide who you would like to leave your assets to. Remember as a short term measure assets left to your spouse are completely free of tax.
Step 3- Examine the special tax reliefs available for certain assets e.g. residential property, business assets and agricultural property.
We can give more advice on this matter by way of consultation for which an extra charge will arise.
Annual Gift Tax Exemption
Every person can receive up to €3,000 per annum by way of gift from any one donor. This means in the case of children they could receive €6,000 per annum from their parents. Each parent can make an annual gift of €3,000 from their own resources to a child which would be completely ignored for gift tax purposes.
Example 1- Use Of Annual Gift Tax Free Allowance
Married couple
With 3 children who are married and who each have 3 of their own children.
3 children
3 in-laws
9 grandchildren
15 x €6,000 per annum= €90,000 Future Tax Saving @ 33% is €29,700.
In this example there is a very substantial future tax saving if the parents can take maximum advantage of the annual gift allowance.
Example 2 – Using all available Tax Free Exemptions
Assume Following Facts:
Questions: How can they distribute the money to minimise tax?
By spreading the benefit over all the family members a large amount of capital acquisitions tax can be saved.
If you need further details or would like to arrange for a consultation to discuss the above please see here.
Everybody is entitled to a certain amount free of any capital acquisitions tax. This is known as your tax-free threshold. The amount of tax-free threshold depends on your relationship with the person from whom you receive the gift or inheritance.
The most common threshold relates to assets transferring from parents to children and the current tax-free threshold for same is €310,000. No liability to tax will arise unless the value of the benefits exceeds this amount.
The second tax-free threshold which amounts to €32,500 applies where benefits are received from other close family relations apart from your parents e.g. grandparents, brothers/sisters & uncles/aunts.
Finally the third tax-free threshold which amounts to €16,250 applies in all other circumstances.
These tax-fee thresholds cover all transfers to you within your lifetime. However any benefits received prior to the 5 December 1991 are ignored. Transfers of assets between spouses are exempt from both gift and inheritance tax.
Where assets are being transferred in or out of Trusts, or limited interests are being acquired, the rules and regulations applying to same are very complicated. Because of the complexity of these matters and the fact that everybody’s circumstances are somewhat different we deal with this type of situation by way of consultation and a separate charge will arise for advice on such matters.
For Further Details Please Email Your Queries to barry.maxwell@paylesstax.ie or Contact Us On 01 524 2332
Overview of Gift & Inheritance Tax
We provide information on the following:
This is the last opportunity for the Revenue to take some of your hard earned assets accumulated during your lifetime. After you pass on, the Revenue hand is out looking for payment of Inheritance Tax.
With increasing personal wealth many individuals find that the values of their estates leave their beneficiaries liable for this tax. It is important to plan for this tax well in advance both from a tax point of view and also to ensure that your assets pass to your beneficiaries in the way you would like them to.
Generally speaking we are dealing here with the transfer of assets within families and more often than not from parents to children or from other close relations.
While the tax has two names, i.e. inheritance tax and also gift tax, it is essentially the one tax. As the name implies inheritance tax arises where you inherit a benefit from a deceased person. Gift tax applies where somebody makes a gift to you during their lifetime.
When somebody makes a gift to you during their lifetime it may also involve other taxes such as capital gains tax and stamp duty in the case of property transfers.
There are special exemptions from the tax in respect of the following assets:
A liability to Irish tax can arise regardless of where the assets are situated e.g. receiving a foreign property can give rise to tax in Ireland as well as any tax that might be payable in the foreign country.
