Can a trust shield our children from inheritance tax?
QMy husband and I had our children quite late in life. We are concerned that we could pass away while our children are still young and want to do our utmost to provide for them should this happen.
We have heard that a trust can boost the value of what we pass onto them – as it would shield them from inheritance tax. Is this true?
Rose, Dingle, Co Kerry
Roisin replies: Increasingly families are looking at the use of trusts and other reliefs to shelter themselves from inheritance tax.
The use of trusts is beneficial where children are minors or where the parents feel that children may not have the capacity to manage an inheritance without supervision. Trusts can also be used with other reliefs to make a tax-efficient transfer to a child. For example, let's say you have an estate of €1m which you wish pass to your child. If you were passing on the estate in cash, the inheritance tax bill would come to approximately €250,000.
If the funds were put into a trust and the child was able to arrange their affairs so that they qualified for agricultural relief, their inheritance tax bill could be significantly reduced. For example, the trust might buy land with the cash and then transfer the land to the child. Using agricultural relief, the value of the land would be reduced by 90 per cent for inheritance tax purposes and the child would be deemed to take an inheritance of €100,000.
If the child had not yet inherited anything from you, he or she would be within the tax-free threshold for inheritance tax. As an inheritance of €100,000 falls below this threshold, the child would have no tax to pay on their inheritance. There may be a discretionary tax charge of 6 per cent which could be reduced to 3 per cent – depending on when the assets come out of the trust. Even if the discretionary tax came to €60,000, this is still significantly below the original tax bill of around €250,000.
Q We are a wealthy family approaching retirement and have started to plan our inheritance. We are worried about the inheritance tax bill that our children could face. Could we reduce this bill for our children – or help them escape it altogether – by moving the family abroad?
Ronald, Enniskerry, Co Wicklow
A You could help your children avoid inheritance tax by moving your entire family out of Ireland – as long as you meet a number of conditions.
If neither the person leaving the asset in their will, nor the person receiving the inheritance, is resident or ordinarily resident in Ireland, then no charge to Irish inheritance tax will apply – unless the assets are situated in Ireland. Therefore, it is feasible for a person to move their entire family outside of Ireland, sell all of their assets in Ireland, move the cash and avoid Irish inheritance tax.
However, the person receiving the inheritance must be non-ordinarily resident in Ireland – that is, he or she must have been living outside of Ireland for at least three years before they receive the inheritance.
Inheritance tax may or may not apply in the country in which the family moves to. For instance in Australia, there is no inheritance tax due by the person receiving the assets – but there may be capital gains tax due on the passing of these assets. This is different to Ireland where there is no capital gains tax due on death.
Roisin Duffy is tax director with UHY Farrelly Dawe White in Co Louth
Sunday Indo Business