Separating the wills from the will-nots
The government is tightening its grip on the rules of inheritance – but there are still a number of exemptions and options available
IN RECENT years Ireland’s inheritance tax regime has become less and less favourable, prompting well-heeled senior citizens to consider drastic measures to minimise future tax bills for their families. Anecdotally, the idea of relocating to a country with a more enticing regime, such as Portugal, is gaining traction. However, escaping the Irish inheritance tax net is not as straightforward as people may believe.
Ireland used to have a relatively cushy inheritance tax set-up. As recently as 2008, the tax rate was just 20 per cent, and children could inherit more than half a million euro tax-free from their parents. Now the rate has risen to 30 per cent, and offspring will face a tax bill if they receive assets worth more than a quarter of a million.
Of course it’s still a less punitive system than that in the UK, where the rate is 40 per cent. Furthermore, asset values have tumbled in Ireland, and surviving spouses are still completely exempt from tax on inheritances left to them by their deceased husband or wife. Nonetheless, for those with significant assets, jurisdictions such as Portugal, where there is no inheritance tax for close family members, start to look interesting.
However, not only is upping sticks and moving overseas an extreme measure, but it may not work – avoiding Irish inheritance tax is easier said than done.
Niall Glynn, tax partner at Deloitte and author of Planning for Family Business Succession, explains the threefold test: Irish gift or inheritance tax will apply if the person making the gift/ inheritance is resident or ordinarily resident (which means you’ve been resident here in excess of three years) in Ireland, or if the person receiving the asset is resident or ordinarily resident in Ireland, or if the gift or inheritance is situated in Ireland.
So if a couple moves to Portugal, but their children remain in Ireland, the plan won’t work – the children will remain liable to Irish tax on assets they receive from their parents. And even if the whole family relocates, if the children are gifted or left an asset located in Ireland, for example land or a farm, then this will also fall within the Irish tax net. In the latter instance, the parents could sell the Irish land (possibly incurring capital gains tax), and then gift the cash proceeds to their children once they’ve all moved outside of Ireland for more than three years, but Glynn points out such a move requires “an awful lot of structuring”.
“It is quite difficult to totally structure your affairs so you don’t fall within the inheritance tax charge. That’s not to say people won’t go to those lengths, but it’s the exception rather than the rule,” he says.
Wealthy people are looking not just at inheritance tax increases, but at tax hikes all round. With income tax rates so high, and the introduction of the universal social charge, people are considering their position, he says. However, in his experience, they only really tend to move overseas as part of a broader lifestyle choice.
Tim O’Rahilly, tax partner with PricewaterhouseCoopers, says a decision of this kind is not a short-term one, so it needs to be planned out and thought through carefully.
It’s also worth bearing in mind that while the Portuguese tax system is currently designed to attract the wealthy, there is no guarantee the country’s tax climate won’t become considerably less balmy in the coming years. After all, Portugal’s economy is even more of a basket case than Ireland’s.
For those who want to do some tax-efficient succession planning without having to learn a new language, there are a number of possible options and exemptions they may be able to take advantage of. Firstly, gift and inheritance tax reliefs for business and agricultural assets have remained in place, despite recommendations from the Commission on Taxation to make them less generous. Glynn says he believes their being left unchanged is a positive thing, as many domestic businesses are struggling at the moment and if such reliefs were to be restricted, the gift tax arising on the transfer of a business from one generation to the next could, in many cases, be the straw that breaks the camel’s back.
Glynn says now is a good time to consider transferring business assets to the next generation, because asset values are at a low point in the cycle. Also, the Irish rate of gift tax could keep rising. The current rate of 30 per cent is still relatively low compared to other European countries. During the 1990s it went as high as 40 per cent.
Owners of family businesses should also be aware of changes coming down the line in relation to retirement relief. Until now, a person who had reached the age of 55 and satisfied a number of conditions could transfer the family business to their child without being liable to any capital gains tax.
However, this year’s Finance Bill introduced a change whereby the maximum value a person aged 66 or over can transfer to their child under this scheme is to be capped at €3 million.
“You can imagine the impact on family business – it will force people to make decisions,” says O’Rahilly. There’s a window between now and the end of 2013 to make those decisions, as the new rules won’t take effect until January 1st, 2014.
“In some respects, it’s a little bit unfair,” says Glynn. “If you’re running a business, you should make your decisions on a commercial basis rather than the most tax-efficient basis.”
Aside from business-related reliefs, there are also a number of smaller steps people can take in terms of succession planning. Instead of leaving all their assets to their children, they could consider splitting the benefits among the wider family to use up various tax-free thresholds.
So for instance, a parent could leave each of the children a tax-free inheritance of €250,000, and then split the remaining benefits between grandchildren, who can receive about €33,000 each without incurring a tax bill.
Also, consider availing of the annual €3,000 gift tax exemption. It may not sound like a lot, but if, for example, a husband and wife both give €3,000 (so a total of €6,000) to each of their four children every year for 10 years, they will have passed €240,000 to their offspring tax-free. “Those smaller things all add up,” says Glynn.
When it comes to planning for retirement, O’Rahilly stresses that people need to mind themselves rather than prioritising their children. Many people are retiring with less wealth than they had expected, so it’s key that they get an understanding of how much they need to fund themselves in retirement, and not make gifts or provide more for their children than they can afford.