AS I SEE IT
Any close encounters with the taxman reduce me to an apprehensive state akin to skating on thin ice. Not knowing what is lurking underneath the ice increases the fear. Ridiculous I know, taxation is an instrument of monetary policy that’s meant to be fair, nevertheless I am not alone in finding taxation ….well taxing.
What happens to that nest egg or the accumulated wealth from a lifetime’s work is a particularly emotional issue. A recent report suggesting a hike in inheritance tax stirred up a hornets’ nest of reactions from political derision when Leo Varadkar dubbed the Report of the Commission on Taxation and Welfare as something that “was straight out of the Sinn Fein manifesto” to howls of protest from senior citizens who see their efforts to benefit the next generation under threat.
“I’ve worked hard and struggled to own my home/ business/farm out of taxed income, so why should I pay double tax” is a typical comment.
It doesn’t seem fair put that way. But in fact, it’s not the now deceased who will pay the tax but their beneficiaries. Inheritance tax is not on the actual estate of the dearly departed but part of the value of the transaction that occurs when money or wealth in some form is transferred to another party.
There hasn’t been an increase yet… and at 33% on taxable elements of inheritance that seems high enough and it doesn’t raise much anyway — about 1% of tax revenue in 2020.
The other point is that there are ways to reduce inheritance tax AKA Capital Acquisitions Tax (CAT). Once you know the rules, there is wiggle room. Surprisingly though, a majority in Ireland don’t even make a will, perhaps to avoid thinking about the Grim Reaper. So I took a look at what is under that revenue ice.
Some of the inheritance tax regulations are straightforward, others merit the advice of a creative accountant and need to be considered long before the thought of succession planning has entered most people’s heads. Also cases vary, depending on circumstances.
Firstly, there are tax-free thresholds which depend on the relationship to the disponer — that is the person who provided the gift or inheritance — and the beneficiary, anything beyond those thresholds is taxed at 33%. Gifts and inheritances between spouses/civil partners are exempt from CAT.
The first threshold (currently €335,000) applies to children (including adopted child, stepchild and certain foster children) The second (currently €32,500) applies to a brother, sister, nephew, niece or lineal relation and the third (currently €16,250) applies in all other cases. There is also a tax-free allowance of €13,000 annually per individual gifted as a way of reducing future inheritance tax.
There’s a balancing act involved here, give too much away and you risk running short of funds for later years and we are all living much longer now.
Planning early is key. “It’s important to sit down and to plan what you want to achieve,” says Adrian McManus of McManus McCabe accountants. Inheritance where businesses and farms are involved are a particular concern when it comes to succession
Tax regulations are designed so that farms, or part of them, and businesses don’t have to be sold off in order to meet inheritance tax but there are strict rules to be met to qualify for business and farming relief of 90%.“In relation to business it’s important to review what has happened each year to reduce tax liability,” says Adrian Mc Manus. “Where a business is growing and where you have built up wealth what is the point in having it all in your name rather than passing ownership early?”
Farm inheritance can be particularly sensitive and knowing the rules for agricultural relief can make a big difference. One of the important ones is that the recipient of an agricultural must have been an active farmer for six years or where the land is leased it must be farmed as a commercial venture for six years.
There are instances where inheritance tax regulations could be used creatively to help resolve issues like the housing crisis or the need for renewable energy. If part of a family home is divided to create a granny flat and the part given to a son or daughter that gift would be liable to CAT, this surely merits changing to get people started on the housing ladder. Allowing marginal farms full relief when leasing to a wind farm would promote renewable energy.
There is a simple solution, though: go skiing, spending the kids’ inheritance…