Q&A

Dominic Coyleanswers your questions

Working out tax implications for inheritances

Q As I understand it, an inheritance is valued on the date probate is granted and tax is due at once. Yet the executors may take months or years to sell shares and other assets - and even longer to wind up the estate and pay out to the heirs. The heirs have no control over this and might end up with a tax bill exceeding their inheritance. This is because the law makes no allowance for a falling market, collapsing currency or delays in winding up an estate.

Suppose I inherited Bradford & Bingley shares valued at £100,000 on the date probate was granted. Suppose they were only worth £10,000 by the time they were sold. The 20 per cent tax owed would be double what I received. Can that be true? A tax rate of 200 per cent?

Suppose, I inherited a house in Zimbabwe valued at a zillion Zimbabwean dollars, which converted to 100,000 on the date of probate. Suppose a zillion Zimbabwean dollars was only worth 1 by the time the house was sold. I'd owe 20,000 on receipts of 1. A tax rate of 2,000,000 per cent! Can that be true?

Interest on "late payments" would only add to the tax due. Of course, a likely expedient in such extreme cases would be to "forget" to declare. But in less extreme cases one might end up paying 50 per cent tax or more on a large "hard-to-forget" inheritance.

These are extreme cases - and my examples neglect the tax-free allowance - but the law seems to make no allowance for declining values. Could it be open to a legal challenge?

Mr D.M., Tipperary

AThough certainly exaggerated, the scenario you raise is one that is arising for a growing number of beneficiaries in the current climate. Not only are property prices declining sharply but stock market volatility can create major gaps between Valuation Date prices and actual sale prices even with the most efficient of executors.

Going back to the start of the process, you are correct that the Valuation Date is the key time in terms of assessing the worth of an inheritance for tax purposes. The Valuation Date is generally the date at which the assets become available to be transferred to the beneficiary - in practical terms, this is usually the date of probate except where assets are passing to a surviving spouse. Revenue rules state that you have four months from the Valuation Date to file a return in respect of your inheritance and to pay any tax owing.

Getting to the nub of your argument - what happens if the realised value of your inheritance - on selling the shares or property you receive - is significantly lower than the Valuation Date estimate?

Unfortunately, it appears there is little you can do. To put it into context, during the Celtic Tiger years when property was rising by the week and share prices went through periods of rapid ascent, no one was complaining that the Valuation Date worth of the asset was considerably below the realised value - and to be fair to the Revenue, it made no attempt to claw back the difference. The current situation is simply the same position in reverse.

During my inquiries, someone mentioned the possibility of opting for a letter from the Revenue that would see the tax levied on the actual proceeds of a sale. This appears to refer to a "sale in the course of administration" and is a very precise circumstance - where a sale of an asset is completed before probate is granted or where the person making the will directs that the estate's assets should be sold and the proceeds distributed to the beneficiaries.

It is not something you, as a beneficiary, can simply elect to use as a valuation benchmark rather than the Valuation Date.

Can the situation be open to legal challenge? I'm no lawyer but, in my experience, pretty much anything can be open to legal challenge. However, if the law makes no provision for declining values in capital acquisitions tax, your only target would be the executor and you would have to prove they had not expedited the terms of the will in a timely manner. Executors have duties in how they handle an estate and most are either lawyers or take legal advice on such matters. They have nothing to gain by unduly delaying the process of passing the inheritances on to the beneficiaries.

In a market where no property is selling, chasing the executor for falling values would be a big reach. The same applies in relation to shares which could well, of course, return to the Valuation Date value or above. Finally, there is no obligation, as far as I know, to accept a bequest. Regardless of the fall in values, you will still generally be better off as a result of the bequest than before. By the way, forgetting to declare an inheritance is not something I would encourage. You could find yourself owing Revenue a lot more than you think.

Understanding cover on accounts

Q My wife and I have two accounts in First Active - a savings account and a deposit account. As this constitutes two accounts, does this mean that we are not entitled to the 200,000 cover which would apply if we had only one account?

Mr D.S., e-mail

AYour question is somewhat overtaken by the rapidly changing events of recent days. With the government guarantee on all bank deposits, you can rest easy about the fate of your funds.

Under the previous regime - to which the Government will presumably revert no later than the two-year term they have outlined under the latest rescue plan - the €100,000 deposit protection guarantee threshold relates to each individual and each institution. The number of accounts you hold in that institution is irrelevant.

Thus, in your case, you would have protection on up to €100,000 held in First Active in your name. Your wife would also have the same protection - but only on accounts held in her name, jointly or otherwise.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara 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.