5 Ways to Reduce Inheritance Tax | PCI

Inheritance tax is often not thought of until it is too late. In 2019 alone over €522 million was collected in inheritance tax by the Irish government. Through clever planning and preparation, you can reduce the inheritance tax that those who inherit your estate will be liable to pay. 

What is inheritance tax?

Inheritance tax is also known as Capital Acquisitions Tax (CAT) in Ireland. CAT is a tax charged on money or property that is gifted to, or inherited by, someone. In Ireland the recipient is responsible for the tax on the gift or inheritance while in the UK the estate of the deceased is liable for the tax.

This tax is also applicable on any gifts or inheritance received by a person since 5th December 1991. 

For example, a sister received a €22,500 inheritance in 2002. She then has €10,000 of her €32,500 threshold left. If the same sister gets a €20,000 inheritance from another sibling in 2021 – the remaining €10,000 from the first inheritance will apply and tax will be charged on €10,000 of the €20,000.

How much is Capital Acquisitions Tax?

The current rate of tax is 33%. There are 3 threshold levels to which the tax is applicable. These are:

Group A Tax-free Threshold

The Group A tax free threshold is €335,000. Anything over this amount is liable to 33% tax. This applies where the person inheriting is the child, adopted child, stepchild, some foster children or child of a deceased child of the donor. 

Parents can also fall into this group where they are taking inheritance from a child upon their passing. 

Group B Tax-free Threshold

The Group B tax-free threshold is €32,500. Anything over this amount is liable to the 33% rate of tax. This threshold applies for brothers, sisters, nieces, nephews, lineal ancestors or lineal descendants such as grandchildren.

Group C Tax-free Threshold

The Group C tax-free threshold is €16,250 and it applies in all other cases. This can include cousins, great-nephews, great-nieces and non-relatives.

Are there ways to Reduce Inheritance Tax?

CAT is a legal requirement in Ireland – even for overseas properties willed to someone where the person giving the benefit or the person receiving it is resident or ordinarily resident in Ireland for tax purposes. 

As you can see from some of the above, there can be substantial tax liabilities to pay on inheritance and gifts. It’s really important to make sure you plan ahead to try and reduce those tax payments – a large tax bill can be quite distressing during bereavement. Here are some ways to reduce the amount of Inheritance Tax payable:

1. Long Term Planned Cash Inheritance

If you are the gifter you can deposit €3,000 a year in cash, tax free, to anyone. This is particularly useful for parents and grandparents as each individual can deposit €3,000 to a person. For example, 4 grandparents can give €3,000 in a year to a grandchild tax free which totals to €12,000.

2. Spouse Transfers

Transfers between spouses or civil partners are tax free. If a parent wills the estate to their spouse or partner they will not be liable for CAT. 

3. Dwelling House Exemption 

You do not have to pay Capital Acquisitions Tax if all of the following applies to you:

• The house was the only or main home of the person who died (this condition does not apply if you are a dependent relative).
• You lived in the house as your main home for the three years before the person’s death.
• You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.
• The house is your main home for six years after you receive the inheritance. This does not apply if you are over 65
  
  
  

4. Other Exemptions

If you receive a gift of a house on or after 25 December 2016, you will be exempt from CAT if:

• You are a dependent relative of the person making the gift because you are:
• Permanently and totally incapacitated due to a physical or intellectual disability, and you are unable to earn a living
• 65 years or older at the date of the gift.
  
• You lived in the house as your main home for the three years before the person’s death.
• You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.
• The house is your main home for six years after you receive the inheritance. This does not apply if you are over 65.
• Favourite Niece/Nephew – you can treat a Niece/Nephew as a child if they have worked for you or your spouse for the last 5 years.
• 15 hours per a week for small businesses.
• 24 hours per a week for all other businesses.

This excludes investment assets.

5. Paying CAT with Inheritance Tax Protection as part of your Life Insurance Policy

Inheritance tax planning, as part of your life insurance policy, can provide the necessary funds to meet the inheritance tax bills on your death. This cover can easily be arranged as part of your Life Insurance policy (Section 72).  

What is a Section 72 Life Insurance Policy?

A Section 72 policy is a life assurance policy, set up under trust for your beneficiaries. It is designed to pay them sufficient money upon your passing to pay the inheritance tax that will be due.

Inheritance Tax Protection

Having the right life insurance policy is the best way to avoid having your beneficiaries faced with a large tax bill when they inherit your estate. Estate planning might seem daunting, but our expert team is on hand to help. Get in touch with our team today to discuss Inheritance Tax Protection today.