In 2009, a child could inherit €542,544 from their parents and pay Capital Acquisitions Tax (CAT) of 25% on the remainder. Fast forward to 2014 and a child can inherit €225,000 tax free and pay CAT of 33% on the remainder. In Ireland, where parents still feel the need to leave an inheritance, the inheritance tax liability that children may be left with causes a lot of headaches. After all, if you inherited €750,000 in 2009, your inheritance tax liability was €51,864. Someone receiving the same inheritance in 2014 faces an inheritance tax liability of €173,250. A whopping 334% increase in just 5 years!!! If you want to reduce the inheritance tax liability that your children will face on your death, what can you do?
As long as you don’t put your own financial future at risk, I am a believer in helping out your children when they need it most and not waiting until you are dead and they are most probably in their late 60’s. That way you can get enjoyment out of helping out your kids and grand kids.
You can gift your children €3,000 a year without any tax implications and so can your spouse. If your child is married with kids, you and your spouse can gift them €6,000 each too. For a family with 2 kids, they can be gifted a total of €24,000 a year.
Not everyone believes in pension funding, but it is a good method of transferring liquid assets to your children on death. Pension funding is also a good way of transferring cash out of a company and into your own name. Any income tax is deferred until you actually draw down from the ARF.
For children under the age of 21, an inherited ARF is included when calculating the CAT liability. But in most cases, those who inherit an ARF are over the age of 21, where the proceeds of the ARF are outside the CAT threshold and It is taxed at the slightly lower rate of 30%.
As most ARF’s are invested with insurance companies, there are extremely liquid and the proceeds can be used to pay off any inheritance tax liability.
A very much under used method of eliminating an inheritance tax liability is to pass the risk to someone else by insuring the risk. You can do this through a life cover plan. By specifying at the outset that the proceeds of the policy are to be used to discharge an inheritance tax liability, the Revenue will allow the proceeds of the policy up to the actual liability to be exempt from CAT. If there is any excess, it is liable to CAT.
How much does this cover cost?
The pay out is the same as receiving a gross return of 5.27% each year for 30 years, except that the returns are guaranteed. If the payout is earlier (we have no idea when we will die), the equivalent return is higher.
So why isn’t this cover used much? One of the main reasons this method is under used is perception; “The children are lucky enough to get an inheritance, they can sort their own tax bill”. Wouldn’t the kids prefer to receive €292,080 less if it saved them €519,750?
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