Subscriber OnlyYour Money

How best to tackle the pressing matter of inheritance tax

Tax-free transfers to children are €310,000, but this is still well shy of pre-crash €542,000

US President Donald Trump vowed to abolish it, but the Swedes did so. The Economist deems it a "fair" tax, philanthropist Chuck Feeney is avoiding it by giving away his fortune, while in Ireland friends are marrying each other to avoid it.

Without going to that extreme, there are steps you can take to mitigate – if not quite avoid – the burden of inheritance tax on those who live after you. After all, at a rate of 33 per cent, it can force your estate to liquidate assets just to meet the tax bill, or risk entering into a settlement with the Revenue Commissioners at a hefty tax rate of 0.0219 per cent a day, or about 8 per cent a year.

While the threshold for tax-free transfers from parents to children has risen in recent years, to €310,000, the level is still far below what the €542,544 it was as the financial crash started to bite on government finances. And if you have two children, that means anything you might leave above €620,000 will be subject to inheritance tax – formally known as Capital Acquisitions Tax (CAT) – at 33 per cent.

While the Government has pledged to gradually increase the threshold up to about €500,000, given the sharp rise in property values, many families will need to get planning.


For business owners and farmers, certain reliefs apply, but for everyone else, what can you do?

Take out a life policy

Section 72 policies cover the cost of settling an inheritance tax bill in the event of your death and, crucially, don't incur a tax liability themselves.

Their application is limited, however. In the first place, the value of your estate would need to be "significantly higher than the thresholds" to be worth your while, suggest Jonathan Sheehan, managing director of Compass Private Wealth. And there is also a limited window of opportunity, typically in your fifties and early sixties. If you leave it too late, your health may mean that you won't get insured.

While such policies will erase your tax bill, they can be expensive. Irish Life example quotes €218 a month for a joint life Section 72 policy, providing cover on €100,000 for two 60-year-olds. If you need a multiple of this, you can see how the sums add up.

For this reason, Sheehan suggests you work out the number of years you’d need to live for to pay the premiums for the value of those to outweigh the sum assured. In the above example, it would be 40 years.

Some families might decide that the children should cover the cost of these premiums. However, as Sheehan notes, this can run into trouble if the premiums are more than €3,000 a year (see small gift exemption below) in the case of a family with just one child because, in the Revenue’s eyes, it’s akin to a gift from the child to the parent. And that too has potential tax issues.

Although such policies are expensive, it may be because while they are whole of life policies, unlike those sold in bygone years, they are not reviewable.

“These section 72 policies are guaranteed as opposed to reviewable, so the premium can’t change,” says Sheehan. This can offer you certainty when estate planning.

“If you’re paying €250 a month into a policy, it’s like you’re giving that money down to the next generation, but you’re doing it in a safer and more tax efficient manner,” advises Sheehan.

They are also not inflation linked, so you may need to get a higher level of insurance than needed today, to account for your estate growing in value, while the future possible direction of tax free thresholds – ie, whether they'll go up or down – should also be considered.

You also need to remember that these policies typically have no cash-in value.

“If you stop paying the premiums, you’ve lost it all,” says Sheehan, adding that if you’re interested in taking out such a policy, you need to make sure you won’t have cash flow problems and can meet the potential 35-40 years of future premiums.

One possible answer here can be to opt for Royal London’s life changes option. This gives you some cash back or a lower amount assured if you stop paying your premiums after 15 years. Premiums will, however, be about 10 per cent more expensive than those available on competing but less flexible products.

Get busy gifting

One of the easiest ways to transfer wealth is by gifting while you're still alive, but experts say it's not used enough.

"It can be very useful but sometimes it's often forgotten about," says Beryl Power, senior tax manager with PwC, noting that the small gift exemption means that a donor can give €3,000 each calendar year to a beneficiary without eroding the thresholds.

One reason why those who have the means don’t avail enough of this exemption is that some parents may rather not see how their children spend their money. But if you do, then it can help reduce bills in future years.

Consider a couple gifting €3,000 a year to each of their daughter, son-in-law and two grandchildren. This would come to €12,000 a year, or €120,000 over 10 years, and it has no adverse affect on inheritance tax thresholds at all.

But be careful how you give the gifts. Putting it all into an account in your own name and then transferring it across in a lump sum won’t satisfy the tax man and will render it liable to inheritance tax.

“Ultimately, to avail of the €3,000 a year, cash has to be physically conveyed across,” advises Sheehan, suggesting that keeping physical documentation on these transactions is important.

Power agrees. “For any beneficiary, it’s important that they keep a record of all the benefits that they have received so that, if there was ever an audit down the line, they can keep a comprehensive list,” she advises.

If you want to gift money to younger children, you could consider doing so via a bare trust, such as that offered by Zurich Life and Standard Life. These are compliant with Revenue and allow you to gift the €3,000 annual sum; the children won't have access until they turn 18 or later.

Other grandparents might wish to use the exemption to pay for their grandchildren’s school fees, but this can be a bit of a grey area.

“While there’s an argument there, my preference would be to keep in a separate account [for the grandchildren],” says Power.

Keep those kids at home

Up until December 25th, 2016, dwelling home relief was used by many to pass on a property tax free to a child. But there have been changes, which mean the donor has to live in the property at the date of death as their only, or main, residence, while the beneficiary also needs to be living in property with the donor.

“It is quite restrictive,” says Power, though he adds that it’s “still a very valid exemption, especially for cohabiting couples in situations where you have a child living with a parent, or siblings living together”.

Consider a partnership

Family partnerships allow assets to grow in the children's name, while parents retain control and some income on that. CAT is limited to the original value of the assets, so any growth will be free of tax.

“The gift happens on the way into the partnership,” says Power, adding that it is “really no different to putting shares in names of children. The key difference with a family partnership is the parent can retain control of the assets”.

They’re expensive to set up – at about €3,000-€4,000 – but do allow one party to keep control over the assets.

“We typically see that when parents want to teach their children about investments and use it as a kind of training structure,” says Power.

When you’re on your own

Given the increasing number of couples childless by choice and people staying single, some would argue that the threshold regime is unfair. After all, anyone who stands to gain from them, will only be able to benefit from much lower category B and C thresholds.

Category B, applying to linear or blood relatives other than parents – siblings, grandparents, uncles and aunts – is just 10 per cent of the Category A threshold applying from parents to children. The threshold in Category C, covering all other transfers, is half of that again.

But this is unlikely to change. In answer to a written parliamentary question last December, Minister for Finance Paschal Donohoe said: "There would be a significant exchequer cost with the extension of the Category A threshold to individuals with no children and it would be likely to give rise to tax planning opportunities."

According to Power, people who don’t have children typically divide their estate among family members such as siblings, nieces and nephews to reduce CAT exposure.

“It makes sense as each beneficiary will have their own separate tax free threshold and, depending on the size of the estate and number of beneficiaries, it may actually cover a large portion of the estate,” she says. “Outside that, I’d be looking at utilising the small gift exemption”, adding that the dwelling house relief might also work.

The tax free thresholds

Category A: Parent to child – €310,000.

Category B: Other direct family bloodline relationships – €32,500

Category C: Stranger – €16,250

Gift today and plan for tomorrow

If gifting – rather than leaving whatever you may have to be inherited – is a goal of yours, then you need to think carefully about it.

“If people are minded to transfer assets during their lifetime, the most important thing to remember is firstly to look after themselves and their spouse,” advises Power.

Second, you could consider a section 73 savings plan, offered by life companies. Revenue approved, it allows you to gift the proceeds of this plan to your estate to meet any tax bills –and crucially, this gift is not liable to inheritance tax.

For example, a €100,000 deposit account, ostensibly created to meet the burden of death taxes, will lose €33,000 in CAT. But a section 73 plan will transfer intact at €100,000.

A couple of criteria have been imposed by Revenue on these plans. They need to have a life cover element of eight times the annual premium plus a unit-linked savings element. They also have a minimum eight-year term and you’ll pay annual management charges of about 1 per cent on the investments.

The challenge with such plans is calculating the amount of tax that might arise at some point in the future as typically they are used to match the liability arising from the gifting of an asset.

If you take out such a plan and change your mind during its term, you’re entitled to keep the proceeds yourself. But if it’s in joint names and both parties die during the eight years, the proceeds go into your estate and are then subject to tax in the usual way.