Being tax efficient with the standard will

A standard will is pretty straight forward; assets go to the surviving spouse and after that, it is split evenly to the children. This is standard fare and parents don’t want their children to fall out by one getting more than the others. While it is fair that the assets are evenly split, it does not mean that each sibling should have to pay the same Capital Acquisitions Tax (CAT)

CAT thresholds

CAT is the tax you pay on gifts and inheritances. The current rate is 33%. A portion of it is tax free. The amount that is tax free is dependent on who you receive the inheritance from. There are different bands with different thresholds based on your relationship to the deceased, known as the disponer. This is a lifetime limit, so if you receive an inheritance from an aunt, this comes off your threshold and the tax free amount from subsequent inheritances is reduces by the sum already received. This has no baring on the threshold from parent to child.

Group A 

• From parent to child
• Threshold of €335,000

Group B

• To parent or grandparent
• To sibling, niece or nephew
• To grandchild
• To a lineal ancestor
• Threshold of €32,500

Group C

• Anyone else not covered by A or B
• Threshold of €16,250

Being tax efficient with the standard will

Now, this is where you use the various thresholds to be tax efficient with the standard will. You still divide your estate evenly. But you also stipulate in your will that your grandchildren and your child’s spouse receive an inheritance, which is to come from your child’s portion.

Let’s look at an example of this. Fionn and Nicola left an estate of €2.1m, split between their three children, Chris, Rob and Amy. Chris is married with 4 kids, Rob is single and has no children and Amy is married with 2 kids. Each is to receive €700,000. Normally, they get the first €335,000 tax free and the remaining €365,000 is taxed at 33%, so a tax bill of €120,450 each.

However, if Fionna and Nicola had adjusted their will?

Chris

1. Group A threshold – €335,000
2. Group B threshold x 4 – €130,000
3. Group C threshold – €16,250

Chris’s family can receive €481,250 tax free, with €218,750 to be taxed, which is a tax bill of €78,188. Chris has saved €42,262 in tax.

Rob

1. Group A threshold – €335,000

Rob has no other family, so there is no change to his tax liability of €120,450. Rob hasn’t been able to reduce his tax bill.

Amy

1. Group A threshold – €335,000
2. Group B threshold x 2 – €130,000
3. Group C threshold – €16,250

Amy’s family can receive €416,250 tax free, with €283,750 to be taxed, which is a tax bill of €92,638. Amy has saved €27,812 in tax.

There is nothing unfair with this, we pay different levels of taxes in our income based on our earnings and how much we put into deductible savings such as pensions. Or if we invest some of our money and pay CGT while another family prefers to spend money instead.

Steven Barrett

24 January 2022