Generation game: plan ahead to save

The idea of sorting your financial affairs so that you are in a position to pass on wealth to the next generation is still a relatively new one for in Ireland.

“It’s probably the first time in Ireland that we are having a large-scale transfer of wealth from one generation to the next,” says Deirdre Lyons of Davy Private Clients.

“If you think about our history, we weren’t really an indigenously wealthy country before, but now you have a whole demographic of people who have created their own wealth though businesses and who are now in their 60s or 70s and thinking about passing that wealth down to their children. That creates challenges – but opportunities as well.”

Tax planning

While inheritance brings a whole range of issues to contend with, tax planning has become central for families in these situations.

Successive reductions in the amount of money or the value of assets a child can inherit tax-free from a parent have brought the figure down from more than €500,000 five years ago to €225,000 today, not to mention a hike in the rate of capital acquisitions tax from 20 per cent to 33 per cent over the same period.

“Typically we encounter families who haven’t considered inheritance tax to any great extent,” says Andrew Fahy, tax and financial planning director at Investec Wealth and Investment.

“The simple fact is that with the thresholds at their current levels, many inheritances are likely to result in sizeable tax bills, which could have been mitigated with some advance planning.”

To take a simple example of a child who stands to inherit property or investments worth €300,000 from a parent, capital acquisitions tax would arise on €75,000 of this sum, meaning a tax bill of nearly €25,000.

Inlaws and grandchildren

But it should be possible to mitigate a large portion – if not all – of this liability by, for example, leaving assets to inlaws and grandchildren, says Beryl Power, senior manager of private client services at PwC.

“An inlaw can receive a benefit of €15,075 free of capital acquisitions tax, and a grandchild can receive a benefit of €30,150, assuming these thresholds have not been used on other benefits.”

A small annual gift exemption of €3,000 a year is also available, says Fahy. “On the surface, it appears insignificant, but the €3,000 is per person so both parents can gift €3,000 to their child. And if their child is married, €12,000 can be passed every year to the younger couple. And if their child has, say, three children, suddenly €30,000 can be passed every year with no effect on anyone’s threshold. That’s €300,000 over 10 years with what some might call pretty rudimentary planning.”

If you have surplus assets, Power says gifting inheritances during your lifetime rather than after your death can make solid financial sense, such as by helping a child set up their own business by purchasing an interest in it and then passing it back to the child and thus availing of business relief on capital acquisitions tax, which reduces the effective rate from 33 per cent to 3.3 per cent.

You can also help a child get on to the property ladder or trade up, she says. “This can be done by purchasing a property for the child, or an interest in the property, and then transferring this interest free of capital acquisitions tax to the child under the dwelling house exemption [where a child lives in the property for at least three years] once certain conditions are met.”

Property assets

Some experts have suggested transferring property assets while values remain relatively low, although with prices recovering, particularly in Dublin, this option may not be as attractive now, says Power. “However, if an individual believes that certain property in their portfolio has a low value, then it may make sense to transfer that property now,” she says.

For family businesses, lifetime transfers are, generally speaking, preferable, says Power, to ensure the transfer to the next generation is smooth and the business does not suffer.

Trusts remain a popular option, particularly for individuals who don’t wish to pass full control of their assets to the next generation, says Fahy. “They can also be useful in circumstances where the timing of an inheritance requires management.”

Succession planning: It’s not all about tax

Succession planning is not all about tax, says Deirdre Lyons, who works on tax and wealth structuring at Davy Private Clients.

“We would always say to clients, there’s no point doing something purely for tax reasons,” she says.

“Sometimes people see a tax relief or a structure, and it’s like a shiny penny to them. They will say, ’Oh yes, we will do that.’ But when you delve into it, it actually doesn’t suit the family circumstances.”

Andrew Fahy of Investec Wealth and Investments agrees. “A weak adviser will shoehorn clients into the most tax-efficient structure that’s available. I don’t agree with that approach,” he says.

“It is better to ascertain what the client is trying to achieve as a parent, and then to look at optimising things from a tax perspective. And sometimes relative simplicity is best. Complex structures that carry large upfront savings can appear great on the surface, but what about their ongoing cost?”

Lyons says Davy Private Clients provides inheritance or succession planning as part of an overarching financial planning service for its investment clients rather than a standalone service.

“There’s a whole range of nontax considerations that we have to discuss with the clients.

“For example, sometimes children are young or they have particular personal issues that mean it’s not suitable for them to take wealth now or even in the future, so you might have to look at trust arrangements.

“Sometimes spouses have been quite hands-off about the family finances, so you have to have discussions about what to do if something happens to the person who normally takes responsibility for the finances. So we try to make it as holistic as possible to see all the angles.”