Inheritance Tax in Ireland: what is your tax liability?
Part 1: Awareness.
I’ve previously touched on the unexpected inheritance tax that cohabiting couples face, this week , I will talk about the unexpected tax bill that children and grandchildren are often left to pay upon inheriting a family home or portion of their loved one’s estate.
The majority of assets in Irish estates are illiquid, held in property. Illiquid assets place pressure on beneficiaries, as Revenue levy the capital acquisition tax on the beneficiary not the estate. Often times, sentimental assets are sold in order to meet the tax deadline imposed. More so, beneficiaries may not agree on how to disperse the estate; one beneficiary may want to keep an investment property as they have access to cash for their portion of the tax bill while the other beneficiary could not meet the tax bill without selling the property.
The circumstances of every estate differs, a bit of pre-planning will clarify ones’ needs. If after assessment you find a large tax liability, making provisions for inheritance tax can prevent family friction and keep more of your estate in the hands of your loved ones. The basics of inheritance tax can be found on our site here or Revenue’s site here.
Below are case studies to illustrate a potential tax liability:
Peter and Elaine have a family home valued at €500,000, a holiday home valued at €150,000 and €50,000 on deposit. They have a son, Tom, aged 40, who is married with young children. Tom wishes to keep and move into his family home. He is inheriting an estate valued at €700,000. Tom is entitled to inherit €335,000 free of tax, the remaining inheritance taxed at 33%. Tom will owe Revenue €120,450, more than the cash left to him. If he does not have the remaining €70,450 available, he will need to consider selling the holiday home or effecting a loan. If there is a housing market down turn he may find it hard to sell in time to pay his liability.
Sarah and David are married and have no children. They have a family home worth €300,000. They wish to leave their home to their niece, Sinead. As Sinead is their niece, a lower tax free inheritance threshold applies. Sinead can inherit just €32,500 free of tax , the remaining is subject to tax at 33%. Sinead would owe Revenue €88,275. If Sinead does not have €88,275 or cannot qualify for a loan, she will be under pressure to sell the home before her tax deadline.
Mary and Gerard have a family home valued at €650,00 and four investment properties valued at a total of €950,000. They have two children. Each child will inherit €800,000 in property. Each child will receive the first €335,000 free of tax and owe €153,450 to Revenue for the remaining inheritance. Both children will need access to cash or lending of €153,450 OR agree on which property(s) to sell to meet their tax liability.
Solution to Case 1. In the first case above, Peter and Elaine (at age 48) estimate their tax liability and establish a Sec. 72 life insurance policy in the amount of €75,000, with a monthly premium of €79.72, detailed quote here. Tom can use the €50,00 cash in the estate along with €70,450 of the proceeds of the Sec 72 policy to pay the tax liability. (the difference between the €75,000 and €70,450 would be taxed leaving Tom with €3,048.50 cash). Tom will have the immediate ability to pay his tax bill.
The solution for case one could be applied to each case. Revenue Section 72 allows a life insurance policy, when structured appropriately, to offset a beneficiary’s inheritance tax. Policies in today’s market offer guaranteed values and flexible options should tax laws or estate values change.
In next week’s blog I will discuss Section 72 life insurance policies in greater detail. (Part 2 Here)
Queries or interest regarding the above? Do not hesitate to contact me.
Rachel O’ Shea, Protection Manager