Ireland has quite a penal inheritance tax system in comparison to other developed countries, which causes these sizeable tax bills after death.
However, with a little bit of planning, you can ensure that you leave behind all of those good memories, without the headache of a nasty tax bill.
We all want to leave our own stamp on the world when we’re gone, and in particular we want to leave a strong legacy behind for our loved ones and people that know us.
Central to this is leaving a sea of good memories. Unfortunately, and all too often, we see these memories being somewhat overshadowed by financial challenges after a death.
These usually come in the shape of an unexpected and sizeable tax bill, to be addressed by bereaved families.
The quick 101 of Inheritance Tax in Ireland
Before the economy in Ireland came crashing down in 2008 / 2009, a parent could leave up to €542,000 to each of their children (smaller thresholds apply for other relationships) before inheritance tax had to be paid.
The tax that had to be paid was 20% of any excess over this amount. This was seen as quite an equitable amount, in comparison with other tax generating methods.
But then the economic crash happened… Suddenly the country had to find new tax sources as income tax, capital gains tax and corporation tax receipts fell sharply. Inheritance tax was seen as an “easy” tax to increase.
As a result, the parent / child threshold was slashed over a few years to a threshold of only €225,000, above which an increased tax rate of 33% had to be paid.
This caused all sorts of problems for people wanting to leave assets, particularly to a single child, and more so where their wealth was mainly tied up in a single property such as the family home.
In many cases, the low threshold resulted in a family home having to be sold by a bereaved child, simply to pay a tax bill.
what are the thresholds and tax rates now?
Fast forward to today. There have been great hopes in recent years as the economy recovered that thresholds would find their way back up to former levels. This hasn’t happened.
However, the threshold has been gradually increased over recent years up to €310,000 now.
Unfortunately the tax rate has stayed stubbornly high at 33% of amounts above the threshold.
Example 1:
A parent leaves a child €500,000 cash in their will.
The first €310,000 is tax free. The remaining €190,000 is subject to tax at 33% so €62,700 is payable to the government. Leaving the child with €437,300.
Example 2:
A parent leaves a child a house valued at €820,000 in their will. The child does not live in the house at the time.
The first €310,000 is tax free. The remaining €510,000 is subject to tax at 33% so €168,300 is payable to the government.
The situation is not so bad where there are a number of children inheriting from a deceased parent, as the threshold amount applies to each individual child.
It’s important also to note that there is no inheritance tax payable by a bereaved spouse. There are also exemptions available when a farm or business are being inherited and in some circumstances where a child is living in the house to be inherited.
This is where planning is really valuable, so it’s important to get advice about these situations.
Planning can save the day
If after you’re gone, it is likely that the value of your assets will exceed the inheritance tax thresholds of all your children, you should come and talk to us as all is actually not lost.
It’s still possible to leave a lasting legacy rather than a tax bill, but this situation needs careful planning and also time for the plan to be successfully implemented. Thankfully there are still a few ways that we can help you.
We will examine your unique circumstances and will develop an inheritance tax plan to reduce that unwanted tax bill. To get you started, here are a few basic actions that you should undertake,
- There are life assurance policies which should be considered if your beneficiaries are likely to inherit amounts in excess of their thresholds. We can help you get this cover in place.
- Another way to reduce or avoid a tax bill on death is to pass on assets at an earlier stage. Every individual can gift €3,000 p.a. to another individual without triggering a tax bill for the recipient. So two parents can gift each of their children €6,000 every year tax free – they can also gift to anyone else that they choose. This can really build up over time.
- Make sure your will is up to date. You want to ensure that your assets are distributed exactly in accordance to your wishes.
- When you’re writing your will and particularly if your assets are significant and it’s in accordance with your wishes, spread your inheritance beyond your children and among grandchildren, parents, siblings, nephews and nieces as each of these will qualify for a tax free threshold of €32,500. Even outside of this, other people will qualify for a further reduced threshold of €16,250. The threshold amounts are lower… but it all counts! Spreading the love can reduce the tax bill payable later.
in summary
These are just some of the initial actions to be considered to reduce that tax bill after you’re gone. If what you leave behind is important to you, then an inheritance tax plan is needed. We’ll be delighted to help you leave a really positive legacy after you.
About The Author…
Michael Geoghegan QFA CFP, previously of Canada Life and The Irish Government Foreign Affairs Dept., is the Managing Director of Agathos Financial Planning. At the top of his field for nearly 20 years, he is a renowned expert in taxation and trusted adviser to some of Ireland’s wealthiest individuals and businesses.
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