My Dad’s cousin (who is deceased three years) bequeathed money to my mother, as she (the deceased), wanted her inheritance to go to the various women in her wider family.
My parents want to forward the inheritance to myself and my three siblings. What is the best way of going about this while avoiding unnecessary or even double taxation? Also, it needs to be a reasonably uncomplicated solution, as my parents are old.
I gather that Mum falls into group C regarding inheritance tax/CAT, and is liable for 33 per cent on everything over €16,750. The amount is above that threshold but it’s not an enormous amount.
I thought a possible scenario might be: Mum pays the tax, which is presumably unavoidable. Then both Mum and Dad each gifts us €3,000 per year = €6,000 per sibling (from their joint account) over two years. As I understand, each parent can separately gift their children €3,000 per year tax-free.
Or might there be an alternative or better way?
Only one sibling lives in Ireland. The other three are in the UK, Switzerland and another EU country.
That’s a nice slice of good fortune for your mother from someone she is not even related to, and also nice that she is minded to pass that good fortune on to you and your siblings.
The best thing in these circumstances is to keep things simple. And the simple fact here is that these are two entirely separate transactions.
First, your mother is inheriting from your father’s cousin. The tax position of that needs to be worked out on its own merits.
Only then when she is in possession of her unexpected inheritance do we come to the second part – how she allocates to you, her children.
So, first up, as you say, your mother is a stranger in terms of inheritance tax law to your father’s cousin – to be fair, he’d be a stranger too. That puts this inheritance into category C, as you correctly surmise. The tax-free threshold there is however even more modest than you think – €16,250.
The big thing here is that it does not apply simply to this inheritance in isolation. The €16,250 threshold covers any inheritance (or large gift worth more than €3,000) that she may have received since December 5th, 1991 – the current aggregation base date – from anyone other than one of her parents (which falls into category A), siblings, grandparents or any brother or sister of one of your parents – ie uncles and aunts “in blood” (all category B).
So, the least she will pay is the 33 per cent rate of capital acquisitions tax on anything over the €16,250 threshold, but she might end up paying that tax on the whole sum if she has previously received €16,250 in one or more gifts or inheritances from anyone else covered by that category.
Once that is out of the way, the net inheritance is your mother’s to do with as she pleases. And there is nothing to stop her passing it on to you and your siblings – either by inheritance when she dies, or as a gift now.
From what you write, it appears that each of you will stand to benefit from around €12,000 as a result of this windfall. Your mother could give that sum to each of you in one go or she can drip-feed it in an effort to avail of the small gift exemption.
If she were to give the money to you all at once, the first €3,000 would be exempt and the balance would be set against your category A capital acquisitions tax (inheritance tax) threshold of €335,000. Whether that is an issue for you really depends on what you are likely to receive from both parents down the line by way of inheritance.
The thing to bear in mind is that the Irish small gift exemption is only relevant to recipients here – ie you. The rules on gifts and inheritances will be different elsewhere within the European Union, and different again in the UK or Switzerland.
In terms of ease of operation, certainly as far as you are concerned, the small gift exemption is an astonishingly simple process. Your mother simply has to give you the money either in cash, by cheque or electronic lodgment. There is no form filling and no formality. CAT is self-declared so it is up to you, the recipient, to keep track of what you have received, from home and under what terms.
The only obligation you have to Revenue in Ireland is to notify them first each time you cross the 80 per cent mark of any of the three thresholds – so €268,000 (for category A), €26,000 (for category B); and €13,000 (for category C) even where you don’t actually exceed the threshold and where no tax is due. You obviously need to contact them again once you exceed the relevant threshold and pay any tax due.
So what about your siblings?
My knowledge of the tax law of other jurisdictions is even more limited than it is of the Irish set-up.
There appears to be some confusion in the information I can find on Switzerland. Accountants RSM state that the Swiss authorities tax gifts (and inheritances) where the donor or the deceased was tax resident in Switzerland, which does not apply here. Other sources suggest the tax is assessed on the basis of the residence of the recipient.
In any case, the applicable tax rate depends on your relationship with the person making the gift and the canton where they live.
In general, gifts from a parent to a child are tax-exempt except in the cantons of Appenzell-Innerrhoden (tax-free limit of 300,000 Swiss francs); Vaud, known in German as Waadt, which includes the city of Lausanne (gifts up to ChF50,000 per year are exempt); and Neuchâtel, where they are taxed at a flat rate of 3 per cent).
No gift tax will apply in the UK to a gift sent by your parents to the sibling(s) who live(s) there.
Across the EU, the rules will vary from state to state – and sometimes between regions in the same country. Some countries don’t tax gifts at all, others exempt inheritances but tax gifts as income, and the majority do have provision to tax gifts based on the residency of the recipient. In general there is an exemption on smaller amounts, but your siblings would need to check what rules apply in the particular country where they reside.
I think, for simplicity’s sake, your parents are best to dish out sums up to the small gift exemption level as you envision, so that they are sending the same amount to each person each time to avoid confusion.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice