It was encouraging to hear the Minister for Finance announce in his recent Budget speech an increase in the tax free threshold on gifts or inheritances from parents to children. The threshold now stands at €280,000 (increase of €55,000 ) with effect from 14 October 2015.
Generally, gift or inheritance tax (collectively known as Capital Acquisitions Tax “CAT” ) will only apply where the ‘lifetime threshold’ has been exceeded. The ‘lifetime threshold’ varies with the degree of relationship between the donor and the recipient of a gift or inheritance.
The current CAT ‘lifetime thresholds’ for a beneficiary are:
Child of the donor € 280,000
Parent, brother, sister, niece, nephew or grandchild of the donor € 30,150
Stranger in blood of the donor € 15,075
The excess value of the aggregated benefits (gifts and/or inheritance ) received over the ‘life time thresholds’ listed above will be subject to gift or inheritance tax, current rate being 33 per cent.
There is no gift or inheritance tax on the transfer of any assets to a spouse either by way of gift or inheritance.
With the increase in the parent to child tax free threshold and tax reliefs on property/value transfers remaining broadly intact in this years’ Budget, now may be a good time to transfer assets and/or family owned businesses to the next generation and avail of the potential tax benefits.
Where assets/value are transferred whilst the donor is still alive, Capital Gains Tax “CGT” and Stamp Duty may arise on that disposal of property. However, the passing of assets on death does not give rise to CGT for the donor and Stamp Duty does not arise for the beneficiaries.
In both cases, there are capital tax reliefs that could be availed of and therefore planning the ultimate transfer of assets and value prior to death can be beneficial for both the donor and the recipient of the benefit.
Provided certain conditions are met, it is possible for the beneficiary of qualifying business assets in respect of a trade, partnership or shares in a private limited company to reduce the gift or inheritance tax cost to 3.3% or nil in some cases. As you will appreciate, this could save the beneficiary a substantial amount of tax. In addition, the donor may be entitled to claim full CGT retirement relief on a transfer of the business to their child or to their niece or nephew. The donor could also have his/her shareholding in a private trading company bought back by the company itself, thereby giving the donor a cash sum that may be paid free of all taxes where certain conditions are met.
In relation to benefits consisting of agricultural property taken prior to 1 January 2015, agricultural property relief was given where the beneficiary qualified as a ‘farmer’ for tax purposes. Qualification was dependent not on whether the individual was actually carrying on farming but solely on whether 80% of the market value of all assets on a particular date comprised of agricultural property. From 1 January 2015, the beneficiary must be an active farmer or lease the property on a long-term basis to an active farmer. Whilst the conditions associated with this relief have grown, it is still possible for a large number of beneficiaries to reduce their gift or inheritance tax bill from 33% to 3.3% or nil on receipt of agricultural assets. In most cases, it should be possible for the donor to obtain CGT retirement relief where the donor has owned and farmed or in some cases let the land prior to the transfer date.
Dwelling House Relief
Some individuals own a large portfolio of residential properties including the family house. Under the current tax regime, it is possible to transfer one or more of these residential properties to children or next of kin without giving rise to any gift or inheritance tax for the recipient. Again, the beneficiary of the residential property must satisfy a number of conditions at the date of the gift or inheritance and therefore correct tax planning advice should be obtained to ensure that the residence can pass free of CAT to the beneficiary. The donor may have a CGT exposure depending on the initial purchase price versus the market value of that property at date of transfer.
Finally - make a Will
The phrase ‘you should never put off until tomorrow what you can do today’ is very appropriate in this case. You may lose the opportunity to reduce the tax bill faced by those who inherit from you if there is no Will in place.
The vast majority of people do not want to consider or make provision for the passing on of assets. We hope that after our death everything will run smoothly and any issues will sort themselves out, but this is not always the case. More often than not, a deceased person’s estate will linger in the hands of third parties before it can be passed to the intended beneficiaries, all because proper legal and tax planning advice was not considered.
High net worth individuals in particular should provide for passing on of their assets in a tax-efficient manner, otherwise it may be necessary for the beneficiaries to sell some or all of those assets in order to pay the substantial inheritance tax bill that may arise.
Where a person does not make a Will, under intestacy rules his/her estate will be divided between his/her next of kin. This may not be in accordance with a person’s wishes but if there is no Will, this is what can happen.
By making a Will, it ensures that the assets go to the intended recipients and in the proportion intended. A Will can ensure that proper arrangements are made for dependents and the special needs of family members. This permits a person to have full control over who receives the various assets or value from the estate. Where proper arrangements are put in place it can also mean that the Will can be structured in such a way so as to minimise inheritance tax for the beneficiaries of the estate. It can also safeguard the passing of business assets to family members and with appropriate measures, the estate could be administered in a timely and more cost-efficient manner.
Geraldine Lee, Associate Director Tax, KPMG, Dockgate, Dock Road. Galway (091 534600 )