Sunday 25 September 2016

Can we avoid lumbering our children with big tax bills when they inherit our properties?

Eoin McGee

Published 14/02/2016 | 02:30

'If either of your children has been living in the property in Dublin city centre for more than three years when it is passed to them, and they then stay in it for a further six years, that part of your estate will pass to them without eating into their tax-free threshold.' Stock image
'If either of your children has been living in the property in Dublin city centre for more than three years when it is passed to them, and they then stay in it for a further six years, that part of your estate will pass to them without eating into their tax-free threshold.' Stock image

My husband and I have a modest amount in savings but we have done well on the value of our home. A property I bought in Dublin city centre in the 1980s has also increased significantly in value since then. We have two children and are planning to pass those properties on to them. However we are worried that they may be left with a big inheritance-tax bill. Is there anything we can do to negate inheritance tax? We are in our late 70s. Imelda, Fairview, Dublin 3

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The current Government has recently increased how much you can give each of your children, either during your lifetime or when you pass away. This limit - known as the tax-free threshold - is now €280,000. This is still well below the value of many properties in Dublin but the recent increase in the threshold is a step in the right direction.

If you don't want to rely on whatever government we end up with to raise the threshold further after the election, there are several things you can do yourself.

If either of your children has been living in the property in Dublin city centre for more than three years when it is passed to them, and they then stay in it for a further six years, that part of your estate will pass to them without eating into their tax-free threshold.

The same can be done with your own home -but there must good reason for your child to live with you. In other words, there must be a care need there to justify why they are living with you.

You also need to be careful that they don't own any other property when they get the gift or inheritance.

You can do similar things when passing businesses or farms but that doesn't appear to apply in your circumstance.

Another useful tool is the annual gift allowance. With this allowance, between yourself and your husband, you could be giving your two kids a total of €12,000 per annum tax-free.

This can be invested in a savings plan that they know nothing about and in years to come, when they are gifted it, the total value of the plan does not come out of the €280,000 threshold.

It is important the plan is set up correctly and assigned to the children but a good tax adviser or financial planner will know exactly how to do this.

Lastly, if your children will still be faced with a bill and you really want your estate to be passed with the tax paid, then you could consider a Section 72 or Section 73 plan. The first is a life policy that pays out in the event of your death, the proceeds of which are offset directly off the inheritance tax bill. Sections 73 is similar, except it is a savings plan that is used to clear the bill.

 

A few years ago, I put money into an investment fund that has a lot of exposure to commodities. The fund has performed really badly over the last year. Should I move my money out of the fund?

John, Dunmore East, Co Waterford

With or without commodities, most funds have had a rough few months. 2015 started well, but the last few months have wiped most people's gains and have brought them back to where they were a year ago.

You mention your fund has a lot of exposure to commodities. This is unusual, because most funds in the Irish market are about 3pc to 5pc invested in commodities - unless they're specifically classed as commodities funds.

If you have a much higher exposure to commodities and this wasn't intentional on your behalf, you need to seriously consider your overall portfolio strategy and, more importantly, look at how well diversified it is.

I have no issue when clients have a bad month, week or even year. In fact, I expect them. No long-term investment will continuously go up. There will be good and bad years.

Provided you have a well-constructed and well-diversified portfolio that is appropriate for you, then you should not be having sleepless nights when world events happen.

We are all hearing that this time is different and that the financial world is broken. I have been in this industry since 1998 and I have heard "It's different this time" countless times.

The reality is we have had four major crashes since I joined the industry - the Russian crisis of 1998, the dotcom crash, 9/11 and Lehman's collapse in 2008. If you were invested in a well-diversified portfolio which was split 60pc shares and 40pc bonds, a year later, you would have achieved a return of 5.25pc. However if you stay invested long-term, you would have achieved 58.5pc growth around five years later.

Diversification (where you spread your money across various types of investments) is not just a pretty chart - it is important you get it right and that it is appropriate for you. If you are happy that your investment portfolio is well constructed and well diversified and, most importantly, appropriate for your needs, then I would be inclined to tell you to stick with it. However, the high exposure to commodities you mentioned suggests it is not.

 

I have got mortgage approval and I am looking for a house. However, I see one of the other banks now saying they will give me 2pc of the mortgage amount back if I get my mortgage with them. Is this worth doing?

Emma, Lucan, Co Dublin

These new 2pc cash-back offers are interesting and they must be working because a second mortgage provider has just started offering them.

Basically, what happens is when you draw down your mortgage, the bank will send you a cheque for 2pc of the mortgage amount.

So if you borrow €250,000, you will get a cheque for €5,000.

Sounds great. You can you use it to buy the new washing machine, dishwasher or even pay for a holiday. It's up to you.

Enjoy the money, though - because, believe me, there is only one person paying for it... and that person is you.

Typically, the mortgage companies offering these incentives will charge you more in interest than the mortgage providers who don't offer this 'hello' money.

Mortgage providers' variable rates are so diverse now - it is not unusual for one provider to have more than six or seven different variable rates which are usually categorised by loan to value ratios (the percentage of the value of the home you're buying).

Let's assume you are borrowing €250,000 over 25 years and your current approval is at an interest rate of 3.5pc. Should you decide to go to one of the providers offering the 2pc cash-back, the interest rate could be 4.5pc. That higher rate would cost you an additional €40,000 in interest over the next 25 years.

And don't fall into the trap of thinking that you can get the €5,000 and switch mortgage provider in a year or two, so that you get a cheaper interest rate. You will have to pay some or all of the €5,000 back should you do so.

Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.

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