I am due to inherit €30,000, is it worth my while to gift my husband half to avoid tax?

I just want to confirm my understanding of the position around deed of variation/family arrangement with wills in Ireland.

I am due to inherit €30,000 from my brother-in-law and I am wondering if it is worth my while to gift my husband half, in order to avoid tax?

Ms C.L.

When someone draws up a will, they generally have two things in mind. First, they want to take care of those closest and dearest to them; second, they want to minimise how much of their estate gets taken in tax.

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There’s an industry of lawyers and tax advisers making a very good living servicing this demand – as evidenced by last week’s article about wealthy individuals in Ireland buying farmland to avail of an inheritance tax loophole while it lasts.

This can be a game of cat and mouse. New reliefs are introduced, advisers notice they can be used entirely legitimately but not in the way the Government originally intended to benefit their (generally) wealthy clients and, over time, amendments are brought in to try to restore the measure to its original purpose.

But what you are talking about is a much longer established structure called a deed of variation, otherwise known as a deed of family arrangement.

Anyone who has been in the UK might be more familiar with it as, in that jurisdiction, it can be a very useful way of effectively rewriting someone’s will – at least in relation to any inheritance you are in line to receive – to take account of changed circumstances, such as the arrival of children, grandchildren or in-laws since the will was originally drafted.

It can also be used in intestacy where the absence of a will might mean, for instance, that a cohabiting partner could otherwise be left with nothing.

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In the UK, such a deed of variation must be in writing and must be signed within two years of the original benefactor dying.

One of the advantages is that rather than being seen as you inheriting and then passing some of that benefit onwards, the benefit you allocate to anyone else under such a deed is considered as coming to them directly from the person who has died.

So what does that mean for you? Well, while there is a lot of similarity between the law here and in the UK due to our shared heritage, there are some significant differences too, not least in relation to inheritance.

For instance, while, in the UK, the tax liability is on the estate of the dead person, in Ireland, the liability rests with the individual beneficiaries depending on the amount involved and the beneficiary’s relationship with the dead person.

In-laws are considered as “strangers” in terms of inheritance. As such, they come under the lowest category C tax-free threshold

And there is a key difference of approach also when it comes to deeds of variation.

While there is nothing stopping you exercising a deed of variation to gift your husband half of what you are inheriting from your brother-in-law, it will have no impact on your tax liability.

In Ireland, as Revenue has confirmed for me, as far as liability for Capital Acquisitions Tax (CAT or inheritance tax) is concerned, you will be considered to have taken the full €30,000 inheritance from your brother-in-law with your husband being seen as taking a subsequent €15,000 gift from you.

Now, in practical terms, that raises no tax bill for your husband as gifts and inheritances between spouses are exempt from inheritance. But it could have tax implications for the recipient of your largesse if you were looking to have a friend benefit, for instance. And it does mean you will face a tax bill.

In-laws are considered as “strangers” in terms of inheritance. As such, they come under the lowest category C tax-free threshold – currently €20,000. So you will face a 33 per cent tax bill on at least €10,000 of this inheritance – €3,300.

It could be more if, as would not be unusual, you previously received an inheritance – or, indeed a gift of more than €3,000 in one year – from a friend, in-law, cousin or more distant relation. They all come under category C and that €20,000 tax-free limit is a lifetime one extending back to cover any inheritance or large gift received since December 5th, 1991.

That leaves you with two choices: you can accept the inheritance and pay the tax due on anything over your tax-free threshold, or you can disclaim the inheritance.

However, that second option is an all or nothing one. You cannot just disclaim €10,000 of the €30,000 so that you stay within your tax-free limit. You will be giving all of it up. Nor have you any right, if you disclaim, to influence where the inheritance goes. That will be determined by the wording of the will.

The money would most likely go to other beneficiaries under a residuary clause – a clause governing the distribution of any assets not specifically allocated to any person or institution.

The bottom line is that, if the intention is to reduce your tax bill, a deed of variation will not do it and, of course, you will have incurred legal costs in getting advice on and drawing up any such deed.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice