How to reduce inheritance tax liability for your family
Ireland has one of the highest death taxes in the world – and this tax is crippling families across the country. It has forced some people to sell their family homes or take out mortgages, simply so they can clear the enormous bills they were hit with after inheriting property or other assets.
Many of these bills are running into hundreds of thousands of euro.
Smaller families and those who own property in Dublin are amongst those hardest hit, according to Oonagh Casey, an expert in inheritance tax with Fagan & Partners.
"Smaller families can mean a small number of beneficiaries, which leads to higher inheritance tax bills," said Casey. "We have seen a case where an only child inherited her parents' family home worth €600,000 as well as savings and shares valued at €86,000. She ended up with an inheritance tax bill of about €152,000. She had to sell the house to pay the tax bill."
The beginnings of a recovery in the property market have triggered concerns amongst older people who are considering passing on family homes or investment properties to their loved ones.
"As the property market is showing signs of recovery, particularly in Dublin, any estate that includes Dublin property could be exposed to greater inheritance tax bills," said Casey. "People who are passing on the family home are concerned that the home may need to be sold to pay the inheritance tax bill – as they may wish that the home be kept in the family."
Those who inherit houses outside Dublin are also struggling to pay hefty death tax bills – because they don't always have the option to sell the property.
"We came across a case recently where an individual had received an inheritance of a cottage down in Mayo valued at €210,000 from his aunt," said Casey. "This triggered an inheritance tax bill of almost €60,000. As the cottage was quite remote, he couldn't sell it. In the end, he took out a mortgage on the property to pay the tax bill."
More people are now being caught for inheritance tax, thanks to the Government's decision to slash the thresholds for this tax over the last few years.
These thresholds limit the amount of money, property or other assets which you can inherit tax free. For example, in early April 2009, a son or daughter could inherit €542,544 tax free from a parent – that has since been chopped to €225,000.
The rate of inheritance tax charged has also soared – from 20 per cent in early November 2008 to 33 per cent today.
So what can you do to keep the taxman's claws out of the inheritance you're planning to leave to loved ones?
Make a will
You will lose the opportunity to reduce the tax bill faced by those who inherit from you if you die without having a will in place.
Get up to speed on the inheritance tax thresholds (which allow you to inherit a certain amount tax free), and then make your will. By keeping within these thresholds, you could save your family, relatives or friends the headache of a tax bill.
Start passing on your inheritance now
Consider passing any investment properties you have on to your children now, while the recovery in the property market is still in its early stages. This could help your children avoid inheritance tax bills – particularly if you own an apartment or a property outside Dublin which hasn't yet recovered from the housing bust. Your son or daughter won't have to pay any inheritance tax on a property left to them if that property is worth less than €225,000.
"By passing on the property whilst it is potentially at a low valuation, any future growth on that property would be in the child's name rather than the parents'," said Eamon Dwyer, managing director of the Cork financial advisers, City Life.
You could pass your family home on to your children while you are still alive –although this is not something that is done very often, according to Dwyer.
"If parents are passing on the family home to children, they would normally retain a life interest in the house when doing so," said Dwyer.
Remember to hire a solicitor if you're transferring any property to your children or other relatives.
Find out if you can eliminate the tax bill
Get up to speed on the exemptions to inheritance tax as you could take action now which could slash or eliminate the tax bill which your children would otherwise face.
For example, you could save your children hundreds of thousands of euro in tax by encouraging them to move into any properties you intend to leave to them.
As long as your child has been living in the house for at least three years before inheriting it – and so long as they meet certain other conditions – he or she should not have to pay any inheritance tax on the property.
The small gift exemption is also useful, particularly if you own a lot of stocks or shares, land or cash and can afford to drip-feed your inheritance while you are still alive. Under this exemption, relatives can get gifts worth up to €3,000 a year without paying tax.
Have cash in your estate
It's a good idea to have some assets in your estate which can be easily cashed in, such as deposit accounts or investment funds.
"By doing so, there will be easily accessible cash in the estate to pay any taxes, without the need to have to sell property or private companies, which can be difficult to shift under duress," said Dwyer.
Set up a trust
Consider setting up a trust if you have young children or grandchildren. This will help you to pass on your wealth to them more tax efficiently – and at a time when they are mature enough to handle their inheritance.
This would be a particularly wise step if you own a lot of property or assets, or if you have your own business or farm.
For example, if you have a family farm and you and your spouse die while your children are still young, your children would normally become entitled to the farm when they reach the age of 18 – unless you have set up a trust to manage how the farm is passed on to your children.
"While your children should be able to get agricultural relief to reduce the size of their inheritance tax bill, they may not have the maturity to deal with the asset at such a young age," says Cormac Brennan, partner with O'Connell Brennan Solicitors.
"In this situation, the parents might best be advised to structure their wills to leave the farm to a discretionary trust for the benefit of their children – which would enable the trustees to exercise their discretion as to when the farm would pass to the children."
He adds: "In the meantime, the farm could be let or managed to fund the educational and maintenance costs of the children.
"When the trustees are satisfied that the children are mature enough to run the farm themselves, the farm could be transferred to them from the trust.
"Agricultural relief from inheritance tax should be available at that stage to significantly reduce the inheritance tax bill for the children.
"While a separate tax, in the form of discretionary trust tax, could arise when the youngest child reaches the age of 21, this can be managed."
How not saying 'I do' could cost in the end
IF you are living with someone, you could find yourself with a hefty tax bill should your partner pass away before you get married or enter into a registered civil partnership, a tax expert has warned.
"With an estimated one in 10 adults in Ireland cohabiting and not married or in a registered civil partnership, inheritance tax bills will come more into focus," says Roisin Duffy, tax director at the Louth accountants, UHY Farrelly Dawe White.
"If an inheritance is taken between those in a civil partnership or marriage, then no inheritance tax applies.
"However, if an inheritance is taken by someone living with their partner – and the cohabitants are not in a civil partnership – the same rights do not apply," Duffy warns.
So, if you are living with someone and not married or in a civil partnership – then you will only be able to inherit up to €15,075 from your partner tax-free.
You will be hit for tax at a rate of 33 per cent on any balance over that limit.
"This is a very serious situation for those left behind – so it is important to understand the consequences of not entering into a marriage or civil partnership," says Duffy.
Hiring the hubby? Here's how to keep taxman sweet
Hiring your spouse or children can help to chop the tax bills of a family business.
However, there is a lot of confusion about the tax rules says Barry Flanagan, chartered tax consultant with contractors.ie. Family businesses which don't pay the right tax will get hit with additional taxes if caught out – as well as interest and penalties.
Here are four tips to keep you sweet with the taxman.
* Before hiring your children, consider how you would advertise the job.
"If you would have difficulty explaining the role to a non-family member, then you should examine whether the employment is bona fide or not," said Flanagan. "Children are typically hired to do very light receptionist, filing, maintenance or cleaning duties."
* Ensure the job is genuine.
"The family member must be performing services or duties in the business and rates of pay must be similar to the rates paid to other employees doing the same type of work," say the Revenue Commissioners. "If the pay is for technical work, the employee should have the skills, qualifications and experience necessary to carry out that work and to justify the rate of pay."
* Back-up documentation, such as legally binding contracts of employment, is not necessary as proof that you are hiring a family member.
"It should be self-evident from the duties performed whether the employment is genuine," says Flanagan.
* If hiring your wife or husband, remember the spouse of a proprietary director of a company is not entitled to a PAYE credit if they are employed by the same firm.
Rich getting richer, poor stay the same
THE rich have seen their share of the total amount of money earned worldwide increase over the last three decades – while the poorest have seen their incomes stagnate, according to a new report.
The report, by the OECD, found earnings of the poorest households have not kept pace with income growth, with many no better off than they were in the 1980s.
By contrast, top earners have seen their share of pre-tax income increase.
The rise was most spectacular in the US, where the share of the richest 1pc in all pre-tax income has more than doubled since 1980.
Ireland is another country where top earners fare very well – the share of the wealthiest 1pc in all pre-tax income has increased from about 5pc to 10pc in Ireland since 1980, according to the report.
"Without concerted action, the gap between the rich and poor is likely to grow wider," said OECD secretary-general Angel Gurria. "It is important to ensure top earners pay their fair share of taxes."
Sunday Indo Business