As the old phrase goes – gifts are best given with a warm hand. This applies to inheritance too.
There are 3 categories for inheritance tax in Ireland:
|Category A||Category B||Category C|
|Relationship||Children||Non-Direct family members. Sisters/Brothers, Grandchildren, Grandparents||Friends, Inlaws, Cousins|
The tax implications can be considerable especially as mostly inheritance is made up of illiquid assets like properties.
Take for example an inheritance like this:
- Property valued at €1,350,000
- Cash/Pensions/Investments worth €550,000
- Total inheritance worth €1,900,000 The 2 beneficiaries are a Daughter (who is married with 2 children and 1 grandchild) and a Son (who has a partner with 3 children).
The Daughter will receive 50% of the inheritance and the Brother 50%. Without any tax planning, the Daughter and brother face a substantial tax liability:
|Total Tax Bill||€202,950||€202,950|
As you can see, there is over €400,000 in tax paid on this inheritance. The unfairness of this is often highlighted by the fact that this inheritance is quite often net of taxes already. The person whose inheritance was generating net of tax (be it income tax or property tax). In many ways, this is double taxation.
Reducing your inheritance tax exposure
There is something you can do about this and this requires planning. There is a number of ways on reducing the inheritance tax burden on your children especially. In the above scenario, the scope of the will can be broadened to include spouses, partners, grandchildren, and great-grandchildren.
|Child Free Threshold||€335,000||€335,000|
|Grandchild Tax-Free Threshold||€65,000||€97,500|
|Great Grandchild Tax-Free Threshold||€32,500|
|Spouse Tax-Free Threshold||€16,250||€16,250|
|Total Tax Bill||€165,413||€165,413|
So just by simply including the wider family in the will, there is a tax saving of over €75,000. But, it does not stop there. As the parents have reasonably large reserves of cash, they can decide to give a tax-free gift of €3,000 to each child, partner, grandchild, and great-grandchild a year. If they plan ahead, this can be span over 10 or so years.
This reduces the taxable income by over €300,000 which gives an extra saving of €99,000.
There are substantial tax savings to be made here and many well-organised families are currently doing this. The cost of the planning is a fraction of the cost of the tax savings. If you are keen to reduce your inheritance tax, get in contact with us below: