Capital Acquisition Tax – Is the state one of the major beneficiaries in your Will?
Capital Acquisition Tax – Is the state one of the major beneficiaries in your Will?
Capital Acquisition Tax – Is the state one of the major beneficiaries in your Will?
Innheritance Tax in Ireland (IHT) might not be something that comes to mind at first when you are arranging your finances and putting your retirement plans in place, however this should form part of your financial plan going forward as taking some small steps now can save a lot of pain further down the line.
In this article I am going to touch on some of the ways you can make life easier for your next of kin after your death and leave them a less painful legacy.
What is Inheritance Tax?
Quite simply IHT or Capital Acquisitions Tax (CAT) is a tax payable on gifts and inheritances received from a deceased individual.
What are the allowances?
-
If you receive a gift or inheritance from an individual there are some tax free allowances that you may benefit from before tax is applied, the rate of tax applied over these allowances is at the rate of 33%, which is quite a hit when you have paid taxes during your lifetime!
The different bands of allowances are shown below
| Group | Relationship to Disponer | Group Threshold |
|---|---|---|
|
1 |
Son/Daughter |
€335,000 |
|
2 |
Parent/Brother/Sister/Niece/Nephew/Grandchild |
€32,500 |
|
3 |
Relationship other than Group 1 or 2
|
€16,250 |
As stated previously any gifts or inheritances received over these
amounts would be subject to CAT at 33% in most cases.
Can I avoid paying these taxes?
The short answer is no but you can plan to reduce these amounts and the earlier you plan the better the situation becomes. There are many ways to reduce the amount of tax payable and in the next section we can look at some of these.
Reducing the pain with proper planning
You may gift, during your lifetime an amount of €3,000 to each child, partner, grandchild and great-grandchild over your lifetime, this can mount up over the years. If we take the example of a married couple with two children and four grandchildren this could amount to €36,000 per annum or €360,000 over a 10 year period. This alone could be a saving of €118,800 before any investment growth, which again would be outside the estate for CAT purposes. In theory this sounds great but what if you want to reduce the CAT charge but the child is either not ready to receive the funds due to age or is not yet responsible to use the money wisely? Well there are solutions available to make the gift to the child but they don’t receive it until the appropriate age or at a time when it would enhance their life rather than endanger it. Think about gifting assets now as any growth would be outside the estate for CAT purposes, an example would be gifting an investment portfolio to one of your children today of €335,000. This could (based on compound investment growth of 5%pa) mean that after 10 years a further €210,679 would be outside the estate for tax purposes. That’s a further saving of €69,524!
Other good housekeeping points on reducing the family’s exposure to CAT would be
Make sure you have a will in place, this will ensure you have your assets going to the people you want when you want it to happen.
- Increase the number of beneficiaries in your will, would you prefer to give more money to the state or other relatives?
- Make gifts during your lifetime and take professional financial advice to ensure things are set up appropriately as the wrong advice can be expensive in the long run.
- Changing the structure of your assets can be a big help and making sure that you have assets that can be exchanged for cash quickly can be less problematic for your family after your death. Many wealthy people in Ireland hold property in their asset portfolio and this can lead to long sale delays and ultimately fines on late payment of CAT.
What charges are there for late filing?
A surcharge applies for the late filing of a return. The surcharge which is a percentage of the Capital Acquisitions Tax due for that year depends on the lateness of the return. 5% of the tax (up to a maximum of €12,695) applies for late filing of less than 2 months. 10% of the tax (up to a maximum of €63,485) applies for late filing of more than 2 months. You may also have to pay the following daily interest rates for late payments:
| Valuation Period | % Interest due |
|---|---|
|
31 March 1976 to 31 July 1978 |
0.0492%
|
|
1 August 1978 to 31 March 1998
|
0.0410% |
|
1 April 1998 to 31 March 2005
|
0.0322% |
|
1 April 2005 to 30 June 2009 |
0.0273% |
|
1 July 2009 to date of payment |
0.0219% |
Source: https://www.revenue.ie/en/gains-gifts-and-inheritance/gift-and-inheritance-tax-cat/what-charges-are-there-for-late-filing.aspx
Over the next ten to twenty years we will see the largest transfer of wealth the world has ever seen and the area of Inheritance Tax will become one of the most important areas of financial planning. We can help you put plans in place to ensure that your family benefit as much as possible from all the wealth you have built up during your lifetime. Inheritance Tax planning is a complex area and something which cannot be left until the last minute, it should be contemplated as early as possible. Many people put off talking about it as they do not want to contemplate their own mortality but as the old adage goes, there is nothing more certain in life than death and taxes!
Contact us today at hello@imperiuswealth.com to arrange a no obligation consultation.
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