Monday 19 March 2018

Can I pass flats on tax-free to my sons?

The exemption that you were hoping to avail of was severely restricted last year
The exemption that you were hoping to avail of was severely restricted last year

Michael Gaffney

Q: I own a couple of apartments in Dublin city centre which I am renting out to tenants. I was hoping to use the dwelling house exemption so that those apartments could be passed onto my sons tax-free. The tenants are due to move out of the apartments soon and my sons were planning to move into an apartment each so that they would qualify for the exemption. I've heard the rules around the exemption have changed though. Will it still be possible for my sons to claim it? Martin, Drumcondra, Dublin 3

Unfortunately, the exemption that you were hoping to avail of was severely restricted last year. It now applies only to inheritances, and even then, only where the dwelling was the only or main residence of the deceased at the date of death. So it can't apply here.

Under the tax-free thresholds for Capital Acquisitions Tax (CAT - also known as gift or inheritance tax), if your sons have not had any gifts from you or your wife to date, they can get gifts of up to €310,000 each from you without gift tax applying. Therefore, if each apartment is worth less than €310,000, you can still give the properties tax-free to your sons. If the apartments are worth more, the tax applies only on the excess. The current rate of gift tax is 33pc.  The Finance Minister indicated that this €310,000 threshold figure will likely rise in the years ahead, so it may be worth waiting to see if this happens.

If you gift the apartments (as opposed to leaving them in your will), Capital Gains Tax (CGT) can also apply if the apartments have increased in value since they were bought. The current rate is 33pc. In this case it's worth getting expert advice.

Can we cut inheritance bill?

Q: My husband and I own a valuable family pub and farm. We're concerned about the inheritance tax bills which we could leave behind when we pass on the business and farm. In order to limit such bills, what tax reliefs should we be aware of when planning our will? Sarah, Co Kerry

There are four particularly important tax reliefs. The first two apply generally irrespective of whether there is a farm or business or not.

The first tax relief is very simple and important. Any assets left to the spouse of a deceased person are exempt from Irish inheritance tax (also known as Capital Acquisitions Tax or CAT).

The second important tax relief is the tax-free threshold for CAT - which is available to anyone who gets an inheritance. The amount one can inherit tax-free under the CAT tax-free threshold will depend on the relationship between the parties. For children inheriting or getting gifts from their parents, the amount that can be inherited tax-free is €310,000 over their lifetime. The Minister for Finance said last year that this figure might increase in future years. For inheritances between other relatives, much less can be inherited tax-free. For example, a sister can only inherit up to €32,500 tax-free from a sibling.

For farmers, a very important relief is agricultural relief. Many conditions apply to this and when they can be met, agricultural property can be valued at 10pc of its real market value for tax purposes. So a farm worth €500,000 can be taxed as if it were worth only €50,000. Also, a farmhouse or mansion house which is "of a character appropriate to the property" can be treated as agricultural property as can farm machinery and livestock.

Finally, for businesses generally, there is a relief called business property relief. This is similar to agricultural relief in that the business can be valued for tax purposes at only 10pc of its real value. Like agricultural relief, many conditions apply to this tax break. Businesses which don't qualify for the relief include those which consist wholly or mainly of one or more of the following: the making or holding of investments; or the dealing of currencies, securities, stocks or shares, land or buildings. However, unlike agricultural relief, shares in a company that owns the business can qualify for tax relief.

Is bequest liable for CGT?

Q: Do I need to be concerned about Capital Gains Tax when leaving something to someone in a will? Ed, Co Donegal

Capital Gains Tax (CGT) does not apply where assets are passed on as part of an inheritance. The person inheriting the asset is treated as if they acquired the asset at its up-to-date value.

So assets inherited can often be sold straight away and there will be no CGT. However, CGT can arise where there are delays in administering the estate and distributing the assets.

The administration of estates can sometimes takes years, and if assets have gone up in value in the meantime, a CGT bill could arise on the distribution of them. Similarly, where assets are held in companies and trusts, these entities might be subject to CGT.

Is a trust a good idea?

My husband and I run a large family business. We want to ensure we don't trigger any major family rifts when we pass on the business. Is a discretionary trust a good idea? Catherine, Athlone, Co Meath

A discretionary trust is where one or more individuals, trustees, take over temporary control of the business until a decision can be made as to who should ultimately own and control it. It is sometimes the right answer - but not always.

For instance, in your case, where you are both involved in running the business, the most obvious solution is for you to take full control and ownership if your husband dies and similarly for him to take control and ownership if you were to die. You can provide for this in your wills.

In the hopefully remote event that you both die prematurely, that's when it gets complicated.

The first problem is deciding who should own and run the business. There may be an obvious successor, maybe a grown- up child, and in that case, the recommendation would be to pass the ownership and control to that successor.

If there are other children, ideally they could be given other assets so they get their fair share of the overall estate. If there are no other assets, so that the business needs to be shared between a number of descendants, it is preferable to specify who runs it and how decisions should be taken in the event of a disagreement. If there are no obvious successors who can run the business (for example if both parents die and the children are not involved or are still small), then a discretionary trust is often used.

You have to pick one or more trusted individuals who will, as trustees, take control of the estate after the owners' death. It is safer to pick three individuals than one or two (for stability and balanced decision making).

The trustees should not have any ownership or potential ownership in the business. Their job is to mind the business and take whatever decisions are necessary in the best interests of those who will inherit the assets. Ultimately they may pass control to one or more of the beneficiaries or maybe even sell the business and distribute the proceeds.

Normally the trustees take guidance from a "letter of wishes" written by the deceased.

That letter will acknowledge that the trustees have the discretion to do what is best, but might suggest some general ideas such as that all children are treated equally, or that if after some time there is still no child interested in running the business, then it is to be sold.

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