Margaret O’Connell outlines five ways to save tax in your estate.
Benjamin Franklin said “…in this world, nothing can be said to be certain except death and taxes.” Inheritance and gift tax have, however, seen a great deal of change since 2009 when the thresholds started to reduce. Whereas in early 2009 the threshold from parent to child was €542,544, fast forward to 2015 and the threshold had dropped to €225,000, but has now risen once again to €310,000. The tax rate has also changed during that period from 20% up to the current 33%. It is important therefore to utilise any tax saving measures possible whether by lifetime gifting or by structuring your will in the correct way. Here I will set out five ways to save tax in your estate, though there are of course other reliefs and exemptions suitable in a myriad of other situations.
1. Capital Gains Tax Set off/ Same Event Allowance
If you are considering making a gift to someone during your lifetime, and they will have to pay gift tax ( CAT) on that gift, then you could consider gifting them shares or a property on which you would have to pay Capital Gains tax.
Taking Jim and his daughter Mary as an example:
Mary has already received the gift of a property some years ago from her parents. This gift used up all of her threshold so on any future gifts from her parents, Mary will have to pay gift tax.
Jim would like to sell some of his shareholdings and he would also like to give a further gift to Mary now. Instead of giving her cash, he decides to gift her some of his shares in Kerry Group plc. Jim bought the shares some years ago and their value has increased substantially since then. Jim will have to pay Capital Gains tax when he transfers the shares to Mary. Mary will also have to pay gift tax on the value of the shares, however Mary can offset the amount of capital gains tax paid by her father Jim against the gift tax she is paying now, leading to a saving on the gift tax.
2. Small Gift Exemption
This is a useful exemption whereby the first €3000 of any gift received from one disponer in any one year is exempt. Note that this only applies to gifts and not inheritances.
Taking the above example again, Jim can gift Mary €3000 each year and it is free of gift tax and it is not aggregated with any other gifts or inheritances for threshold purposes. Furthermore, Jim can gift €3000 per year to Mary’s husband and to Mary’s four children. Alt
ogether, Jim can gift €18,000 per year to Mary and her family. Mary’s mother can also do this, which would mean a total €36,000 per year for Mary and her family from her parents without triggering gift tax and without eating into any threshold that might be left.
Of course not everyone has the ready funds to make these kinds of gifts, but it is something to bear in mind for those fortunate enough to be in a position to make one or more such gifts.
3. Utilise those thresholds
If you feel that amount you intend to give either by way of a gift or your will may exceed your beneficiary’s threshold, then you could consider also benefiting their spouse and their children. Your son’s wife can take €16,250 from you presently and each of your grandchildren can take a further €32,500 ( assuming thresholds haven’t already been used for prior gifts or inheritances). Spreading the inheritance or gift between members of a family can substantially reduce tax bills.
4. Dwellinghouse exemption
This exemption used to apply to gifts of dwellinghouses in the past but has now been restricted- in the case of gifts-to gifts of houses to dependent relatives only.
However the exemption is still relevant for inheritances. If you intend to leave a property in your will, then you should examine whether this exemption could apply. Some of the main provisions to qualify are as follows. If your beneficiary resides there with you ( it must be your principle place of residence) and has for the three years prior to your death, continues to reside there for another 6 and doesn’t have an interest in any other property, then this exemption may apply. If it does apply, then the inheritance is free of tax and does not utilise the threshold. This is useful for co-habiting couples and for situations where, for example, one child resides with you. However if you have other properties then careful planning is necessary in your will so that you don’t inadvertently disqualify your beneficiary by leaving them an interest in another house.
5. Insurance policies
If you don’t want to leave a substantial tax bill in the event of your death, then you could consider buying an insurance policy. These ‘s.60 policies’ are exempt from inheritance tax to the extent that they are used to pay tax arising on your death or within a year of your death for dispositions made by you. The premiums for these policies can be expensive- €8,000 to €10,000 per year depending on the amount you wish to cover and there are some restrictions, but it is possible to ask your children to cover the cost of the policy if this is something you would like to consider. There are similar policies available for gifts also.
Insurance policies can also be very useful for co-habiting couples, who presently do not enjoy the same tax treatment as married couples and have a much lower threshold to take from each other. In this case a ‘Life of another, Life assurance policy’ may well be a good idea to prevent a possible large tax bill. The dwellinghouse exemption discussed above would also apply.
About the author: Margaret O’Connell is an Associate Solicitor and a qualified Trust and Estate Practitioner ( TEP) and is a member of STEP international.