How does Capital Acquisition Tax work?
In Ireland, Capital Acquisition Tax ( CAT) is more prominently known as Inheritance Tax.
CAT is a tax that’s charged on money or property which is gifted to or inherited by a beneficiary.
The tax applies to all inherited property that is located in Ireland.
If the beneficiaries of your will receive sums in excess of the set thresholds for CAT, inheritance tax will be charged.
However, if you receive a gift or inheritance from your spouse or civil partner, you are exempt from CAT.
What are the thresholds for Inheritance tax?
There are 3 separate threshold levels or groups...
Group A: In this group, the tax-free threshold is set at €335,000 applicable where the beneficiary is a:
* Child ( also includes an adopted child, step-child, and certain foster children )
* Minor child of a deceased child of the disponer ( ie. the donor)
*Parents where they take an absolute inheritance (full and complete ownership) from a child and the relevant inheritance is activated on the death of the child.
(if parents do not comply with these conditions, they fall into Group B)
Group B: In this group, the tax-free threshold is €32,500 applicable where the beneficiary is a...
Parents ( see ref.above in Group A )
Group C: In this group, the tax-free threshold is €16,250 and is applicable to all other recipients not included in Group A or B. Typically, this category includes cousins, great-nephews, and nieces, non-relatives etc.
What is the Current CAT rate?
The current rate of inheritance tax in Ireland is 33%.
Some examples of Inheritance Tax Computations
1. A daughter receives an inheritance of a house valued at €550,000 from a parent.
This is €215,000 over the Group A threshold (€335,000) .
The tax bill would therefore be 33% of €215,000 which amounts to €70,950
2. A brother and sister inherit a house valued at €790,000.
The total inheritance tax threshold for both children is €670,000 ( ie €335k x 2 )
This is €120,000 over the threshold and the 33% would therefore mean a tax liability of €40,000 (ie €20,000 for each child)
3. A grandchild inherits a house valued at €300,000.
The tax-free threshold ( Group B ) is set at €32,500.
This is € €267,500 over the threshold
The inheritance tax bill would therefore amount to 33% of €267.5k which would mean a tax settlement of €88,275.
When are the Inheritance taxes due?
All Capital Acquisitions tax due on inheritances and gifts with a set valuation date in the 12 month period ending August 31st must be paid and filed before October 31st of that particular year.
If you don’t make a tax return and pay before October 31st, a late filing charge of 5% will apply if the delay is 2 months or less.
This increases to 10% after that time period. Late payment interest charges of 0.0219% per day will also come into force which is equal to 8% per annum.
Who is exempt from INHERITANCE / GIFT TAX :
* All gifts or inheritances from a wife/husband or civil partner.
* Payments for compensation/ damages
* Winnings derived from betting, lotteries, sweepstakes, games etc.
* You are exempt from inheritance tax on a house you inherit if all of the following are fully complied with:
1. The house was the only or principal home of the person who died.
2. You resided in the house as your main home for 3 years prior to the person's death. The house remains your home for 6 years after you receive the inheritance. ( does not apply if you are over 65)
3. You are not an owner or have an interest/ share in any other house.
Is there a Life Insurance plan that can cover the cost of Inheritance Tax?
If a life insurance plan is instigated to provide for the inheritance tax, Revenue will not charge the tax due provided the money is used to pay inheritance tax on the death of the lives insured under the policy.
This can be an effective and efficient way to generate adequate cash which your beneficiaries would receive tax-free to pay their respective portions of the inheritance tax.
To qualify for Section 72, the said person covered under the policy plan must also pay the premium.
Is there a Savings plan that can cover the cost of Gift Tax?
There is in fact a savings policy that can be used to fund a Gift Tax bill. This policy is known as a Section 73 savings policy. The policy is set up by the person who intends to gift / leave the amount to the said person. The policy when matured is then used to pay the gift tax bill and the proceeds of this policy are exempt from Capital Acquisitions Tax, provided they are used for payment of the tax. There are certain revenue rules that apply to these policies but in general, they are probably the most underused product on the market,
Should you have any queries around Estate Planning feel free to call me on 086 2293032 or email me directly at firstname.lastname@example.org