In Irish taxation of a deceased estate, are retirement funds exempt/excluded from calculation of the estate’s capital gains tax? Where I come from, retirement funds are generally excluded from inheritance taxes.
Also, in terms of the dwelling house relief, how do people ensure they are able to get this? What proof is required by Revenue to qualify for the relief?
TK
How retirement funds are taxed at death in Ireland really depends on the nature of the retirement fund. Was it an annuity or an approved retirement fund (ARF)? I am assuming here that the person was retired already.
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Let’s start with annuities. If the annuity was for the sole benefit of the deceased, it dies with them and there is no benefit to the estate, unless there was a minimum payment period that had not expired. In that case, it would be taxed under inheritance tax.
If it is a joint life annuity where there will be an ongoing survivor’s payment to a spouse or partner, it does not form part of the estate either, so the question is moot.
Things are different with ARFs, which are an increasingly common vehicle used for retirement funds given the generally poor value in annuities.
First up, the ARF’s assets are considered part of the dead person’s estate. What happens next very much depends on who benefits from the ARF going forward, as well as their age.
If it passes to a spouse or partner, then no tax is taken at that point. However, the spouse will pay income tax on any sum drawn down from the fund. If it is cashed in by the spouse, it will be subject to income tax at the marginal rate of the ARF’s now-dead holder in that year. Because of the potential tax bill, that is a choice rarely taken.
If the money in the ARF is inherited by a child, their age is important. Under 21, it is subject to capital acquisitions tax (CAT or inheritance tax) at 33 per cent on any amount in excess of the child’s €400,000 lifetime limit on gifts and inheritances from a parent.
If the child is over 21, the money is subject to income tax, not CAT but at a special rate of 30 per cent.
If the beneficiary is someone other than a spouse or child, it will be liable to income tax (at up to 40 per cent) on withdrawals and also CAT.
In relation to dwelling house relief, the rules are fairly straightforward. First, the house being inherited must have been the only or main family home of the deceased person (the rules are different if the beneficiary is a dependent relative, but I don’t think that is what we are talking about here).
From the point of view of the beneficiary, they must have lived in the property for the three years before the homeowner died and they most not own – or have any financial interest in – any other property at the time they inherit.
Oddly, owning a house or apartment previously will not disqualify them. They must also not benefit from any other physical property of the homeowner.
Once they inherit, they need either to live there for the next six years or live in another property bought with the entire proceeds of the sale of the inherited property for that combined time.
If they are already over 65, that six-year rule does not apply. They also do not lose out if they have to live elsewhere for work or medical reasons. Otherwise, if the six-year rule is not observed, Revenue will claw back some of the benefit.
How does the beneficiary prove their case?
Inheritance tax is self-assessed, with beneficiaries liable to file an IT38 form. You would only be required to substantiate your claim if Revenue queries it.
If you are living somewhere for three years – even where the utility and other bills might be in the name of the homeowner – you really should have some written evidence of your residence.
For instance, it would be expected that the address on any bank, An Post or credit union accounts would be that of the relevant property. So too, the address held on file for you by your employer and Revenue for your tax affairs.
The same goes for the Electoral Register, though so many are poor at doing that.
Then there are the details held by your local GP and dentist. This extends to the details used for any social welfare payment, driving licence or insurance, mobile phone or other contract taken out during those three years or longer, as may be the case.
If you had ever redirected your mail through An Post, that would also prove your case.
