The issue of inheritance and gift tax (CAT ) is becoming more important to many people because of the reduction in the amount an individual can receive tax free. When an individual decides to transfer his/her assets to another person, either by gift or on their death, assets over a certain value will attract CAT. The current rate of tax is 25 per cent, there is speculation that it will increase in the upcoming budget. It is important that individuals plan the transfer of assets in a tax efficient manner, as many people may be forced to sell assets they have been gifted or left on an individual's death in an attempt to pay the CAT liability.
Example
Andrew dies and leaves property worth €600,000 to his daughter Mary. Mary has received no prior benefits. Mary will be faced with a CAT liability of €66,979.
As a result Mary may be forced to sell part of the property in order pay the CAT liability.
Tax Free Thresholds
Under current tax legislation the tax free thresholds are as follows:
Parent to child €332,084
Grandparents, brothers,
sisters, nephews, nieces,
or grandchildren €33,208
Others €16,064
Spouses
Gifts and inheritances between married persons do not give rise to CAT.
Small Gift Exemption
Each individual is entitled to a tax exemption of €3,000 currently in respect of gifts received annually from each donor. This relief can be used on an ongoing basis by both parents giving €3,000 each to a child annually where a CAT liability is anticipated in the future. Over 10 years this couple could transfer €60,000 to a child tax free.
Let us now look at some of the reliefs that are available which can reduce or eliminate the CAT liability
Agricultural relief
This relief provides that the value of agricultural property, livestock, and bloodstock inherited or gifted will be reduced by 90 per cent for tax purposes. In effect the individual will be assessed for CAT purposes on 10 per cent of the market value of the agricultural property. In order to qualify for the relief, an individual must satisfy the farmer test. A farmer is an individual in respect of whom not less than 80 per cent of their total assets, after taking the gift/inheritance of agricultural property consist of agricultural property.
Example
Bill gifts his farm to his son Pat. The farm has a market value €1,000,000. Pat has no other property.
Pat will qualify for the relief and his gift for CAT purposes will be reduced to €100,000. His tax free threshold will cover the €100,000 and Pat will have no gift tax to pay.
If Pat had not satisfied the farmer test, he could have had a CAT liability of €166,979
An important aspect of claiming agricultural relief is that the Individual must continue to own the farmland for a period of six years from date of the gift/inheritance to avoid a claw back of the tax saved. If the land in question has any development value and the land is disposed of between six and ten years after the date of the gift/inheritance, the relief granted will be clawed back in respect of the development element. There is a provision that if you sell the land within the six year period and that all the proceeds are reinvested in agricultural land within one year of selling it, the clawback will not apply.
It is not necessary that the individual farms the land throughout this six year period – he/she could rent it. There is a requirement that the individual remains tax resident in Ireland for three tax years immediately following the date of the gift/inheritance.
Business Property Relief
The aim of Business Property relief is to facilitate the transfer of family businesses. This relief allows an individual to reduce the market value of his/her business property by 90 per cent for tax purposes. In effect the individual will be assessed for CAT purposes on 10 per cent of the market value of the business property.
Example
Michael dies and leaves his business worth €500,000 to his son Cillian. Cillian satisfies the conditions for business relief and consequently has no CAT liability. If Cillian did not qualify for business relief he would have a CAT liability of €41,979.
An important aspect of claiming business relief is that the Individual must continue to operate the business for a period of six years from date of the gift/inheritance to avoid a claw back of the tax saved.
There are other reliefs available such as favourite nephew/niece relief, dwelling house exemption. It is essential that all transactions are planned in a tax efficient manner as CAT legislation is particularly complex and professional advice should be sought in advance to prevent unforeseen tax liabilities. It is expected that some of the reliefs outlined above will be restricted in the Budget on December 6, people are bringing forward transfers to protect their position.
