Ink has not been spared in the discussion of the effects of the fall in asset values since the start of the financial crisis in 2008. While it is beyond doubt that personal wealth has been substantially impaired, the purse from which a deceased may benefit their loved ones has incurred a similar deterioration.
Compounding the downward spiral in the value of one’s underlying real assets, the quantum of inheritance that one can expect to receive has been further eroded by a change in course of the taxation policy relating to inheritance.
In four years, capital acquisitions tax (CAT) thresholds have, in some cases, approximately halved, while the tax rate has increased by half.
Inheritance rights
Prior to considering tax implications, it is useful to recall inheritance rights, which are frequently misunderstood.
If a lawfully married spouse dies with or without a will, the surviving spouse will be entitled to a fixed share of the estate. Similarly, recent law requires that a surviving civil partner will enjoy the same inheritance rights.
The existence of a will has a bearing on the proportion of the inheritance that a spouse/civil partner is, at minimum, entitled to.
This may vary depending upon the existence of children. If a spouse/civil partner dies having made a will (“testate”), irrespective of its contents, the surviving party is entitled to their “legal right share”.
This amounts to half of the estate but only one-third if there are children. If bequeathed a gift in a will, a spouse/civil partner may choose between either that gift or their legal right share.
Conversely, where a deceased dies without a will (“intestate”), there are clear statutory rules as to the entitlements of the spouse/civil partner. If there are no children, the spouse/civil partner will take the whole estate, but only two-thirds if there are children.
Section 117 of the Succession Act, 1965, provides that children of a deceased may commence proceedings seeking provision out of their parent’s estate. A parent has a moral duty to make proper provision for their children in accordance with their means, whether by way of a will or during their lifetime.
A court will consider such a claim from the point of view of a prudent and just parent. Crucially, an action must be commenced within six months from the time that the representatives of the estate obtain authority from the Probate Office (a “grant”). This avenue is only available where a deceased dies with a valid will.
However, if a deceased dies without making a will, their children are entitled to a statutory share of their parent’s estate, depending upon the existence of other children or spouse/civil partner.
Recent legislation has enshrined succession rights in Irish law for people who are not married or civil partners, but who are living together as a couple (whether of the same or opposite sex) in an intimate and committed relationship (and who are not related).
In seeking provision out of their cohabitant’s estate, a “qualified cohabitant”, must (i) have been in a relationship of cohabitation with another adult; and (ii) immediately before the time that the relationship ended, were living with the other adult (as a couple) for a period of two years or more, where there are dependent children, or five years or more in any other case.
Critically, a claim must be commenced within six months of the date of the grant.
Unlike the statutory rights as enjoyed by spouses, civil partners, children and cohabitants, other relatives of the deceased enjoy no such statutory benefit.
This lack of protection in no way affects an entitlement to any gift that a deceased may have left any person under a will. However, on intestacy, other relations may benefit if they are the closest surviving next-of-kin of a deceased.
Of course, should no next-of-kin be forthcoming, the State will be the ultimate successor.
Taxation
Once inheritance rights are established, the effect of taxation on those entitlements must be considered. Spouses and civil partners are insulated from CAT liabilities on the inheritance of assets from each other.
The position is markedly different for children who inherit assets from a parent. In the first quarter of 2009, a child could inherit up to €542,544 free from CAT. Inheritances above this level were taxed at the rate of 22 per cent. It should be recalled that such thresholds and tax rates existed against a backdrop of the prevailing asset values of the time.
Successive Finance Acts have since eroded CAT thresholds while elevating the relevant tax rate. The effect has been substantial. Those inheriting assets from a parent after December 6th, 2012, can only inherit up to €225,000 tax-free with sums above this threshold taxed at the rate of 33 per cent. Similar changes have been wrought to the position of other relatives who may benefit from a deceased’s estate who were already subject to much lower thresholds.
The past four years have seen thresholds approximately halve, while the tax rate has increased by half.
This represents a substantial impairment of inheritance entitlements. It remains to be seen as to whether this trajectory will continue.
Karl Dowling and Robert Grimes are barristers and authors of the professional title, the
Irish Probate Practitioner’s Handbook
by Thomson Reuters; Grimes is also the author of the consumer book
Your Inheritance Rights in Ireland
, published by GoldGreen.ie