Q&A

Your personal finance questions are answered here

From time to time you explain the tax implications of inheriting money. You explain the tax-free threshold, which depends upon the relationship between the deceased and the legatee. You explain that over and above this threshold an inheritance tax of 20 per cent is payable.

But what you never make clear is who pays the tax. Is it paid by the executors when administering the estate for probate? And if so, does the legatee receive the inheritance without having to pay further tax on it, and without having to declare it in an income tax return? Or does the legatee have to pay tax on the cheque received from the executors?

Mr P.B., Wicklow

The responsibility for capital acquisitions tax (CAT or inheritance/gift tax as it is more popularly known) rests with the person receiving the inheritance or gift and not with the person making the bequest or their estate.

This may be at odds with the way the system works in other jurisdictions but it is the basis on which inheritance taxation has operated in Ireland.

The executors of an estate have the responsibility to ensure that they have paid off any debts accruing to the estate and that they have cleared probate before disbursing assets to the beneficiaries, in accordance with the provisions of any will. However, they have no responsibility in relation to the paying of capital acquisitions tax.

You are required to settle any tax liability that may arise in relation to a gift or a bequest within four months of what is known as the valuation date. This is generally the date probate is granted on the estate, although in the case of assets being passed on other than through a will - for instance where the person dies intestate - the valuation date is generally the date on which the person dies.

Capital acquisitions tax is self-assessed and an inheritance tax form can be got from your local tax office. Bear in mind, that while the CAT rate is 20 per cent, you can be held liable for interest if you delay beyond the four-month deadline in settling any liability.

SSIA scheme

I have been following closely your correspondence regarding residency and SSIA accounts for people who have been or are working abroad during the life of the SSIA scheme. I don't think the issue that concerns me has been specifically covered by the other queries.

My son, who was self-employed and completely tax-compliant, left Ireland to work in Canada in August 2003. He was in possession of a two-year work visa at that time. He settled his Irish tax affairs for 2003.

He had opened an SSIA in April 2002 and has kept up his contributions.

His Canadian visa has been extended and he will not be returning to work or live permanently in Ireland in the foreseeable future.

My understanding is that he is considered to be "ordinarily resident" in Ireland until December 2006 and therefore can continue his SSIA contributions until then.

He intends to cease his contributions on December 31st, 2006, and leave the account untouched until maturity in April 2007.

Is this a correct interpretation of the regulations? It would seem to be unfair for the Revenue to expect people, particularly in this age of mobility, to see into the future regarding their employment prospects.

Ms D.D., e-mail

You are entirely correct in your understanding of ordinary residence.

Having left the State in August 2003, your son will cease to become ordinarily resident at the end of 2006.

However, it is not simply the case that the special savings incentive account (SSIA) can then be frozen and left to mature. Under the rules of the scheme, people who are no longer ordinarily resident in the State are not entitled to hold an SSIA and the account should therefore be closed at that point.

There is also a responsibility on the financial institutions offering the accounts to notify Revenue when they believe an accountholder no longer meets the criteria for holding an account.

Furthermore, as you can read in more detail on the page alongside, the institutions are required to send all SSIA savers a form in the months before they mature.

Savers are required to confirm on that form, which is sent back to the Revenue, that they continue to meet all the requirements for eligibility to hold an SSIA.

Can the form be fudged? No doubt it can, but that then brings you into the realm of criminal offences - in this case punishable by a fine or imprisonment of up to six months.

It's unclear how assiduous the Revenue will be in pursuing the issue, especially as the number of people whose eligibility has lapsed will be minuscule in the context of the overall number of SSIA accounts, but the tax authorities have been increasingly pro-active in these matters . . . and, in any case, making a false declaration is illegal and hardly seems a chance worth taking.

Once your son's eligibility lapses, the account should be closed. At that point, tax will be levied on everything in the account - the contributions made by your son from already taxed income, the 25 per cent Government bonus and any investment or interest income. This is in line with the rules for all accounts closed early.

To be fair, if your son did nothing until the maturity date, he would still face taxation on that basis - rather than simply on the investment/interest gain - as he is ineligible and his account would not therefore be deemed to mature in the normal sense.

You point out, quite logically, that young people can hardly be expected to see into the future regarding employment prospects. However, it is also reasonable that the State cannot be expected to use taxpayers' funds to incentivise savings that will be spent outside the jurisdiction.

Policy windfall

I am in the fifth year of a €90,000 mortgage. Repayments are approximately €650 per month. I am 44 years of age with a €50,0000 salary. I have recently received €60,000 from an old investment policy. Should I repay some of the mortgage or invest the €60,000?

Ms D.McG., e-mail

Your approach to this windfall depends on your approach to investment risk and to debt. The general advice is that one should pay off one's debts before looking to grow assets by way of investment or other savings . . . and that is good advice. Mortgage rates are currently hovering above 3.5 per cent - although they are likely to rise as early as next week when the European Central Bank is expected to increase interest rates by a quarter percentage point.

On the other side, interest rates on savings accounts are generally slightly lower than mortgage rates - not surprisingly.

Therefore, if your are intending to put that windfall into a guaranteed savings account, you would be better off clearing your mortgage debt first.

If, however, you have a more relaxed approach to risk, investment intermediaries would expect to be able to grow your money at a higher rate than that currently applying to mortgages - even allowing for the cost of commissions and other investment charges.

Naturally, this cannot be guaranteed and there is always a possibility, especially in the shorter-term, that your investments could lose money. Whether you are prepared to take such a risk with this windfall is a judgment only you can make.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 10-16 D'Olier Street, Dublin 2 or by e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.