Inheritance Tax - Planning for the Future
In the current market, practitioners should take time to discuss tax planning with clients, in particular gift and inheritance tax planning, with a view to preserving wealth.
While tax planning can be complex, there are a number of simple methods to reduce future potential gift and inheritance tax liabilities. Some areas which may be of interest to clients are outlined below.
Practitioners will be aware that CAT arises on the gift or inheritance of an asset. There is a lifetime tax free amount that can be gifted or inherited. After this, tax applies at the rate of 20%. The tax-free amount is determined by the relationship between the person who makes the gift or inheritance and the recipient of the gift or inheritance. The tax free amount is indexed annually for inflation. Table 1 indicates the 2008 and 2007 thresholds.
Use of the Lifetime Threshold
Where a parent wishes to make a lifetime gift to a child they should ensure that it does not exceed the threshold applicable in that year. In
that way, the child will be entitled to the annual increase in the threshold.
If the threshold has been exceeded in a particular year, the individual does not get the benefit of the annual inflationary increase. For example, if a parent gifted a child €500,000 in 2007 and €20,000 in 2008, the child would pay CAT on the €20,000 in 2008 as they had previously received a cash gift in excess of the threshold.
However, if the gift was €495,000 in 2008 and €25,000 in 2008, no CAT would be payable by the child in 2008. In both cases, the child receives the same amount of cash but in the second scenario there is no liability to CAT on the gifts received.
Availing of Annual Gift Tax Exemption
Each individual can gift €3,000 per annum to each of their children and grandchildren without resulting in a tax liability. In addition, those gifts are not included in calculating the total value of benefits received in determining whether the cumulative gifts/inheritances are in excess of the individual’s lifetime threshold.
Therefore, over a period of 18 years, an individual can gift €54,000 to another individual tax free regardless of the relationship between the two individuals. With regard to gifts made by parents to children, this is in addition to normal gifts for maintenance and education.
Gift on Marriage
It may also be possible to make a substantial gift to a child on the occasion of their marriage. The level of tax-free gift that can be made depends on the circumstances in each case and in particular on the means and general expenditure of the parent.
Acquiring Property with Children
If a client is making new long-term share investments, consideration should be given to including their children as minority shareholders. The shares would be required to be held on trust by the parent until the children reach 18 years. A shareholders’ agreement should be drawn up to ensure a parent would retain voting control.
Properties can also be acquired in a co-ownership structure with children. The children’s share of the coownership would have to be held on trust until they reach 18 years. The provision of a bank guarantee is not treated as a gift unless the guarantee is called in for payment. By involving children in part ownership of assets, an individual can cap their own wealth and ensure that future growth in their assets does not give rise to gift or inheritance tax for their offspring. It can also eliminate or reduce capital gains tax and stamp duty if a decision is made at a later stage to make a lifetime disposition of those assets to the children.
Lifetime Gift of a Dwelling House
Even though a number of changes were introduced in the 2007 Finance Act (with effect from 20 February 2007), it is still possible to transfer a dwelling house to a donee, for example a son or daughter, without incurring gift tax. The exemption is still available where:
(a) A son or daughter resides in the house with a parent for a period of at least three years prior to the gift and during which period a parent was compelled by reason of old age or infirmity to rely on the services of the child, or
(b) A donee has occupied a house as his or her only and main residence for a period of three years preceding the gift and for a period of six years after the gift and where the donor (parent) has owned the house for the three years prior to the gift. This would apply, for example, where a parent buys a house and his son or daughter lives in it for three years and subsequently the parent gifts him/her the house.
Careful attention needs to be given to the benefit of such a transaction following Finance Act 2007, as stamp duty could arise on the purchase by the parent. Previously, this could have been avoided if the son/daughter was a first time buyer or a reduced ratecould have applied if it was a new house. Capital gains tax would also apply on the disposal by the parent on the increase in value over the three years although this is likely to be less of an issue in the current market. Stamp duty would also be payable by the child on the gift from the parent at half the appropriate rate due to the availability of consanguinity relief.
CGT / CAT Credit
If gift tax arises on the transfer of an asset which also gives rise to capital gains tax for the transferor, the capital gains tax can be credited against the gift tax in most cases, thereby reducing the overall charge to 20%. For example, if a parent were to transfer shares to a child, the capital gains tax arising on the disposal by the parent could be used to offset the gift tax payable by the child. Care is required to ensure that this relief is not lost. For example, the relief would effectively be lost where the child had a tax-free threshold remaining. In this case a gift of cash could be made to the child to use up their threshold, before the asset giving rise to the gain is gifted.
With effect from 2 February 2006, in order for the credit to be available the child must retain the assets for a period of two years or the relief is clawed back. Prior to disposing of long-term investments, consideration could be given to transferring the investments to children and for them to delay an onward sale for two years.
This could be carried out using option agreements and could also be advantageous to a purchaser from a cash flow perspective. In the past, this has worked well for the sale of development land.
Agricultural & BusinessProperty Reliefs
Agricultural and Business Property Reliefs reduce the taxable value of qualifying assets by 90%. The assets are normally required to be held for a minimum period of six years after the inheritance or gift is received. For gifts or inheritances taken after 2 February 2006, the clawback period was extended to ten years in relation to lands which have development value. Interest charges are computed by reference to the date of the event giving rise to the clawback rather than the date on which the recipient received the gift or inheritance. Woodlands also qualify for agricultural relief. There is no clawback period and the beneficiary is not required to qualify as a ‘farmer’ for agricultural relief purposes in order for agricultural relief to apply.
It should also be remembered that agricultural property includes farmhouses and mansion houses (together with lands occupied therewith) that are of a character appropriate to the property.
Discretionary Will Trusts An individual should always review or redraft their will every few years, as and when their circumstances change. Individuals should consider inserting a discretionary trust clause in their will. This should ensure that inheritance tax is postponed until further tax planning can be carried out which could reduce the final tax payable to circa 2%. This could be achieved if, for example, the trustees were to purchase assets which qualify for agricultural or business property relief before distributing them to the beneficiaries of the will. Care needs to be taken in drafting discretionary will trusts to ensure that discretionary trust tax does not arise.Information Return on
Once a beneficiary receives gifts or inheritances in excess of 80% of their lifetime threshold, they are obliged to make a gift tax return. The return must be made within four months of receiving the gift which brought the beneficiary over 80% of the relevant threshold.
Enduring Powers of Attorney
An Enduring Power comes into effect when the person who has given it loses legal capacity. In the absence of an Enduring Power of Attorney, where a person becomes mentally incapacitated, any assets held by that person can no longer be managed by them. However, no other person has the right to step in and deal with those assets. The issue is often solved by making the person a Ward of Court and taking their assets into Wardship. However, the Wards of Court office only considers the interest of the individual who is incapacitated and does not take a commercial view on the interest of the business or the future interest of family members who may inherit the business. For that reason business owners should take steps to ensure that a person is nominated by them to take over the management of their affairs if they become incapacitated.
In order to execute an Enduring Power of Attorney, the person giving it must consult their Solicitor and their Doctor to ensure that they fully understand the extent of what they are doing. Therefore, there are quite tight controls around the giving of such power and a family member has to be appointed as the notice party and they will be notified if the power is to be used.
Without planning, up to 20% of an individual’s net wealth could be payable to Revenue on their death. With a little time and some simple planning this tax cost can be substantially reduced. Practitioners should ensure that clients review their existing inheritance tax plan regularly to ensure it is appropriately updated for changes in family circumstances and changes in legislation.
Jane O’Hanlon, ACA is with Purcell McQuillan Tax Partners, an independent tax consultancy practice. Email: firstname.lastname@example.org
10/13/2008 10:47:22 AM
In second paragraph under the heading "Use of the Lifetime Threshold" it states that where a child receives a 20,000 gift from a parent in 2008 and had previously received a gift from parent of 500,000 in 2007 that CAT would be payable on the 20,000 gift. How is this the case? If the cumulative gifts are less than the threshold of 521,208 would tax on aggregate A not be Nil?