INHERITANCE: Financial advisers may help you split your estate among a number of individuals to reduce the overall amount payable to the Revenue, writes Laura Slattery

Most people draw up wills for the peace of mind that comes with knowing that dependants will be well-catered for after they die. But if a will is structured in a particular way, there can be tax benefits, too.

A person who receives a gift or inheritance above a certain value usually has to pay capital acquisitions tax (CAT), which is set at 20 per cent. It is a self-assessed tax that depends on the relationship between the donor and receiver. Spouses are exempt but children who inherit more than a certain tax-free threshold are liable.

When drawing up a will, tax advisers may help you split your estate among a number of individuals to reduce the overall amount of tax payable, with children, the spouses of children and grandchildren each receiving slightly less than the tax-free threshold.

"But the will has to make sense legally and must abide by the client's wishes," says Mr Fred Kerr, who specialises in capital taxes at accountants Ernst & Young. "There's no point having a will that is tax-effective but not what the client wants."

In other words, the testator may know that a surviving child would be much happier to pay tax on the entire estate than receive a smaller, tax-free share and see the rest of the estate distributed among distant relatives.

For 2002, the tax-free threshold for inheritances passing from a person to his or her child is €422,148. This threshold can also apply to grandchildren under the age of 18 whose parent is dead, and to certain nieces and nephews if they have worked for the donor's business for five years before the date of death.

Other relatives can inherit up to €42,215 tax-free. But cohabiting couples, even those who have children, are treated as strangers for tax purposes and can only inherit up to €21,108 before becoming eligible for inheritance tax. Up to two years ago, this meant that cohabiting siblings or cohabiting partners were often landed with a hefty tax bill if they inherited the other half of their home.

"Inheritance tax caused big problems with the family home," says Ms Susan O'Connell from McCann Fitzgerald solicitors. "Some people couldn't afford to keep the house or couldn't take out a mortgage on the house to pay the tax because they had no income to pay the mortgage back. It was very difficult."

Under the Finance Act 2000, the main residential property became exempt from capital acquisitions tax, provided the beneficiary does not own any other residential property, has lived in the house for three years before the donor's death and continues to live in the house for a further six years.

But the surviving partner is not necessarily tied to the same house, unable to move on with their own life, Ms O'Connell explains.

"There are ways of replacing the house with another property, or if you need to move for employment or medical reasons, then the six-year rule does not apply," she says. The rule also does not apply if the beneficiary is over the age of 55.

Tax relief on some business properties may be available under certain conditions. Business relief and agricultural relief both reduce the taxable value of the property by 90 per cent.

"Some people think that they qualify and are surprised to find out that they don't," says Mr Kerr.

To be eligible for agricultural relief from CAT, the beneficiary must qualify as a "farmer" - at least 80 per cent of their assets or future assets must be agricultural.

Even if you have never set foot on a farm in your life, you can benefit from agricultural relief. Beneficiaries of cash gifts in wills can avail of the relief, on the condition that the money is used to purchase agricultural property within two years of the inheritance and the property is then kept for six years.

If any of these conditions are not met, the relief is then "clawed back".