The Government gets very little returns from taxes on inheritances, but that is of little consolation to those faced with hefty Revenue bills on receipt of an inheritance or gift from a relative or friend.
There are two possible tax liabilities on the receipt of an inheritance: Probate Tax and Capital Acquisitions Tax. There are ways in to reduce them but they cannot be avoided. This week we look at the latter.
Capital Acquisitions Tax
At some stage, most people will have to work out their liability under Capital Acquisition Tax (CAT). This is a tax payable on a sliding scale on all inheritances above certain thresholds. These thresholds depend on the relationship between the deceased and the beneficiary.
In the case of a parent to a child, or vice versa, or in the case of a grandparent to a young grandchild whose parents are deceased, the limit is £185,550.
In the case of bequests to siblings, nephews, nieces and all other granchildren, the threshold is £24,740.
In all other cases, the upper limit before tax is £12,370. These figures increase each year in line with inflation.
Above the thresholds, the rate of CAT payable works on a sliding scale. On the first £10,000 above the relevant limit, tax is due at 20 per cent; for the next £30,000, the rate is 30 per cent; and on the balance, the rate is 40 per cent. However, the first £500 of any gift or inheritance in any given tax year is exempt.
Gifts bestowed prior to death are taxed at threequarters of the appropriate tax rate above the thresholds, as long as the gift is made at least two years before death; otherwise the full tax charge is made.
It is important to remember that the provisions of CAT are cumulative on gifts and inheritances made since June 1982. Therefore, in assessing the tax due on any particular gift or inheritance, the beneficiary must consider previous gifts and inheritances and their relationship to the person making the bequest or gift.
There is no CAT due for inheritances between spouses. Apart from that, there are generous concessions on the transfer of business or agricultural assets in certain prescribed circumstances.
Apart from these, the exceptions to CAT include charitable bequests or gifts, pensions and death-in-service benefits, lottery winnings, insurance policies taken out with a view to meeting CAT liabilities, and maintenance or support payments, including those for the purpose of education.
There are also exemptions for heritage properties whose owners meet certain criteria and items considered to be of national or historical interest.
Assets are valued on their disposable value and may be subject to the provisions of Capital Gains Tax - as in shares or other investments which have grown in value.
In the case of inheritances from people living abroad, tax is generally payable only on those assets within Ireland - an increasingly relevant provision given the growing wealth of the Irish diaspora.
Unmarried Couples
One of the great anomalies of the present law is that there is no provision for the transfer of property between unmarried couples. As it stands, on the death of a partner, the surviving partner is entitled to receive an inheritance to the value of £12,370 - the threshold for non-relatives - before paying tax. While the introduction of divorce may allow some to end this anomaly, it is likely to become a serious issue for the growing number of couples who choose not to get married.
Getting advice
Even as simple an outline as this shows the myriad issues which arise in deciding how best, or most efficiently to dispose of one's assets upon death or before it. In all but the most basic cases, professional advice from a solicitor would be recommended. This is likely to become ever more the case as Ireland's burgeoning economy and booming property values take more and more of its citizens above the inheritance thresholds.
Send your queries to Q&A, Business This Week, 10-15 D'Olier St, Dublin 2.
