One of my siblings has asked if, were she to leave a substantial amount (say, €200,000) to one of my children, would it impact what I, as a parent, could leave for that child? My understanding is that it would have no bearing as there are three lifetime thresholds.
My other advice to my sister was to make sure she enjoys the fruits of her labour to the maximum that she wishes to before considering my children or any others.
DC
Inheritance tax thresholds do tend to confuse people. Unlike most taxes, there are different thresholds, depending not on the amount you receive but on the relationship between the giver and the beneficiary.
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This is not unusual for inheritance taxes in different countries but it is very different from the taxes we are more used to – income tax, universal social charge, VAT, corporation tax, capital gains tax, etc.
And perhaps because it is not something most people have to think about regularly, there is more room for confusion.
Figures published by the Central Statistics Office state that, for almost two-thirds of Irish households, inheritance tax and thresholds is simply not an issue as they do not inherit or get gifts big enough to count.
And even for those who do, the average amount is just over €80,000. Given that, in most cases, where people inherit, they will do so from their parents, it gives some sense as to how few people really have to worry about thresholds.
Of course, those figures were for 2020 and the CSO noted that the frequency of inheritance was accelerating. Given property values, the average amount will also be rising.
You are quite correct when you say what your sister does or does not decide to do in relation to your children has absolutely no bearing on what you can give them or leave for them.
There are three separate categories under capital acquisitions tax (the formal name for inheritance tax) and each operates entirely independent of the others.
The other thing to remember is that a person can give anyone else – related or otherwise – up to €3,000 with no tax liability and without affecting tax free inheritance/gift thresholds.
Back to those three categories. Category A covers inheritances and large gifts from parents to children.
The threshold can change from time to time but, for now, it is €400,000. That is not what each parent can leave a child, it is the amount any children can receive in total from their both parents – or even more than two where they are adopted or fostered.
Category A can also cover a grandchild if your child has died and the grandchild is under the age of 18. And it covers inheritances received by a parent from a child if you are unlucky enough to have a child who dies before you.
Category B covers inheritance and large gifts between close blood relations other than parents.
This covers anything a person receives from a grandparent (or great-grandparent), an aunt or uncle or a sibling – a sister or brother. We are talking aunts and uncles by blood here. If your mum’s sister leaves you something, it comes under category B; if the person your mum’s sister marries – someone you would habitually call “uncle” – it does not come under this category as they are not a blood relation.
The threshold here is €40,000 this year and it is cumulative, like category A, so you must add up any inheritance or gift above €3,000 in value from anyone in this category to see if you have reached the threshold or not.
Category C covers everyone else. It is habitually called “strangers” but it includes people you might consider relatives – your in-laws, cousins and those aunts or uncles who have married into the family, as well as your friends, neighbours and anyone else.
The threshold here right now is €20,000 and, as with the other categories it is cumulative.
And how far do you have to keep track of these inheritances? At the moment, you need to tot up separately everything received under each category since December 5th, 1991. That’s almost 35 years ago so it is worth writing these things down to keep track.
The bottom line is that if one of your kids have the good fortune to get €200,000 from their aunt, the first €40,000 will be free of tax if they never inherited before from a close relative. The rest will be taxed at 33 per cent.
And that child can still, separately, receive up to €400,000 tax free from you and their other parent.
