Inheritance Tax: JFL Financial Advisors

Irish Inheritance & CAT Tax

Protecting your Assets on Transfer

Current legislation states that a charge to Capital Acquisitions Tax or CAT arises where someone is in receipt of a gift or inheritance. Gifts or inheritances of Irish property are liable to tax whether or not the disponer ( i.e. the person giving the gift or inheritance) is resident or domiciled in Ireland. Foreign property is liable to tax only where either the disponer or the beneficiary is resident or ordinarily resident in Ireland at the relevant date.

The tax is charged on the taxable value of the gift or inheritance, which is the full market value of the gift or inheritance less any liabilities or costs which must be paid by the beneficiary, less the value of any consideration which the beneficiary has given to the disponer.

The relationship between the disponer and the beneficiary is central to assessing the CAT liability. This is because depending on that relationship a certain level of benefits may pass between them before a liability to CAT will arise. This non taxable level is known as a Group Threshold.

The tax free Group Thresholds that apply from 7th April 2009 are as follows:

Group Threshold (1) of €434,000 where the beneficiary is the child of the disponer, the minor child (under 18) of a deceased child of the disponer or the foster child of the disponer. A parent of the disponer can also be classed in this threshold if the interest taken is an absolute interest and it is taken as an inheritance on the death of the disponer.

Group Threshold (2) of €43,400 where the beneficiary is a lineal ancestor (eg. grandparent), a lineal descendent (other than a child or minor child of a deceased child eg. a grandchild), a brother, a sister or a child of a brother or sister (i.e. blood nephew or niece) of the disponer.

Group Threshold (3) of €21,700 where the beneficiary (who is not a spouse of the disponer) does not stand to the disponer in a relationship referred to in (1) or (2) above. Please note that in-laws and cousins are regarded as strangers for the purposes of CAT and therefore Group Threshold (3) applies.

These threshold amounts are increased each year in line with inflation.

For benefits taken on or after 5th December 2001, all benefits received from someone in the same Group Threshold as the current disponer since 5th December 1991 are added together to calculate how much, if any of the current benefit will be liable to CAT.

The current rate of CAT payable over and above the group threshold is 25%, the tax rate below the threshold is 0%.

The reality is that CAT can significantly reduce the value of a gift or inheritance therefore it is good practice to be aware of the thresholds and use them to their full potential. Where possible you should plan ahead so as to minimise the amount of CAT due by fully utilising the various reliefs and exemptions that are available. The most commonly applicable of these is the small gift exemption, whereby the first €3,000 of the total taxable value of all taxable gifts, taken by a donee from any one disponer, in any calander year, is exempt from tax and is not taken into account in computing CAT. It is also excluded from any future aggregation.

In particular the impact of CAT will be felt where the transfer comprises of illiquid assets and these assets have to be sold in order to realise the money needed to pay the tax.

One method of reducing the inheritance tax payable by a successor is for the disponer to effect a Section 60 policy, the proceeds of which are to cover the inheritance tax payable on the individuals death or within a year from their death. The difference between this and a normal life insurance policy is that any proceeds which are used to pay inheritance tax are exempt from tax in respect of that inheritance, any part of the proceeds not so used will be added to the individuals estate and will be liable to inheritance tax. This provision does not apply to gifts.

However, section 119 exempts from gift tax the proceeds of a relevant insurance policy taken out by an insured expressly to pay gift tax on a lifetime disposition to be made by them in the future. If a disponer makes a gift of property to a donee, that gift will give rise to gift tax. The purpose of this section is so that if the disponer then wishes to pay the disponers gift tax, such payment is not regarded as a further gift taken by the donee from the disponer which would be liable to tax in its own right.

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