Property dive and taxman slash value of inheritances
THE property crash may well be over – but the upturn could be too little too late for anyone who is about to receive an inheritance.
Many people have seen their inheritances wiped out over the last few years – thanks to the double whammy of the banking crisis and the downturn in the property market. On top of this, the taxman is getting more of its teeth into inheritances today than he has in the past.
"There is no doubt that inheritances have reduced somewhat," says Michael Gaffney, partner with KPMG. "Irish people have tended to keep a lot of their assets in property, so the drop in values has had a big impact on inheritances. A generation of property investors and developers were hit by the crash – and many lost everything."
The collapse in the property market has knocked as much as 60 per cent off the price of homes. Anyone who is being left property today could easily be looking at an inheritance which is worth less than half of what it would have been during the boom.
"If there are borrowings outstanding on a property, the effect of those borrowings – combined with the drop in property values – could be anything up to 100 per cent on the inheritance," says Gaffney.
Many of the inheritances pocketed today are between 40 per cent and 60 per cent lower than those received during the boom years, according to Oonagh Casey, tax partner with the Dublin tax adviser, Fagan & Partners. "People who invested in property or bank shares are nursing heavier losses," says Casey.
The taxman too is getting a bigger chunk of people's inheritances. The amount you can inherit tax-free is now less than half of what it stood at almost five years ago. In early 2009, you could have inherited €542,544 from a parent tax-free. This has since fallen to €225,000. Furthermore, capital acquisitions tax (CAT – the tax you pay on an inheritance) has also soared. In 2008, the CAT rate was 20 per cent – it is now 33 per cent.
"A lot more clients who previously would have fallen outside the inheritance tax net must now pay tax," says Casey.
Casey has seen cases where recent inheritance tax changes and hikes – combined with property falls – have knocked 50 per cent off the value of inheritances.
Another hangover of the economic squeeze is the propensity of parents to help out their children financially.
This has not only chipped away at the ultimate value of inheritances, it has also increased the danger of an inheritance ending up in the hands of a bank or creditor. This is particularly true if a child's borrowings are on a full recourse basis – where a bank or creditor is entitled to chase a borrower's assets.
"Many parents, who are otherwise financially secure, have transferred assets or funds to children by way of an advance on their inheritance, in circumstances where their children are themselves in financial difficulty," says Cormac Brennan, at Dublin law firm, O'Connell Brennan Solicitors.
"Any parent should be cautious about transferring assets to children who are in difficulty. If a child's borrowings are on a full recourse basis, this would include any assets that the child may receive from their parents – whether during their lifetime or by way of inheritance. Trust structures may often be used to protect the assets of parents from the creditors of their children, and to allow grandchildren to benefit by way of generation skipping."
Many parents are under so much financial pressure when drip-feeding their inheritance that they have been forced to delay their retirement.
"We are seeing clients who are giving help during their lifetime, rather than passing on assets as an inheritance," says Casey. "In some cases, this is actually putting economic pressure on the parents themselves, particularly where they have gone as guarantors for property for their children.
"Individuals who had hoped for early retirement are now finding themselves working far longer than they ever planned. We have some clients who now expect to retire at 70 rather than take early retirement, all due to increased financial commitments."