Monday 15 October 2018

Your Questions Answered: Does teenager face inheritance tax bill?

 

Inheritance tax. Photo: Stock Image
Inheritance tax. Photo: Stock Image

John Byrne - Tax partner with Crowe Horwath (crowehorwath.ie)

Q My 15-year-old daughter has inherited €80,000 from her late granddad. Does she have to pay tax on the inheritance? If so, as she's not working, and therefore not a taxpayer, how exactly does she pay the inheritance tax? John,Tralee, Co Kerry

A As your daughter is a minor, she cannot hold money in her own right and a personal representative must hold her inheritance until she reaches 18.

We have assumed that no trust has been established for the inheritance, so therefore inheritance tax is payable by reference to the valuation date. The valuation date is the date on which a personal representative is entitled to retain the €80,000 for your daughter.

Since your daughter is a lineal descendent of the benefactor (her granddad) she is entitled to part of her inheritance tax-free. Her relationship with her granddad would be categorised under Group B, which means that the first €32,500 of the inheritance is not taxable. Any prior gifts or inheritances received by her from her granddad would reduce or eliminate this tax-free amount.

Assuming that your daughter has never received any gifts or inheritances before, €47,500 of the inheritance would be liable to tax (once the €32,500 tax-free inheritance she is entitled to is accounted for). As inheritance tax is charged at a rate of 33pc, the tax payable on this inheritance should be €15,675. A Form IT38S must be completed and submitted to the Revenue Commissioners. If the valuation date is between January 1 and August 31, the deadline for the inheritance tax to be paid by is October 31 of that year.

If the valuation date is between September 1 and December 31, the deadline for the tax payment is October 31 in the following year.

Tax on Irish inheritance

Q I inherited a property in Ireland (along with my nine cousins) in 2000. We all live in Britain. We are in the process of selling the property for €190,000. Will we be charged Capital Gains Tax (CGT) on the entire sale price of €190,000 - or on the amount it has increased in value by since 2000? (That is, if it was worth €100,000 in 2000, would our CGT be based on €90,000)? Would the CGT relief of €1,270 be per individual - or only available on the property as a whole? Are there any other taxes we need to be aware of? (We have just found out we have to pay a €7,200 NPPR fee as we were unaware this had been implemented.) Must we get individual PRSI numbers prior to the sale? Finally, are the taxes deducted at the completion of sale or do we need to contact the tax office ourselves as individuals? Rosie, Lancashire

A CGT arises on the gain from the date of inheritance. This taxable gain can be reduced by any enhancement expenditure incurred during your ownership. You can also deduct legal fees or other costs associated with the sale from the gain.

Indexation relief, which increases the acquisition cost for inflation, would also apply and depending on when in 2000 you inherited the property, this increases the tax deductible cost to €119,300 (if inherited before April 2000) or €114,400 (if inherited after April 2000).

In this example, the maximum chargeable gain on the property would be €75,600.

This gain is spread among all 10 individuals, (that is, €7,560 each), from which the CGT personal exemption relief of €1,270 is deductible - leaving each person with a taxable gain of €6,290 which if taxed at the 33pc CGT rate, would give each individual a CGT liability of €2,076.

A Form CG1 is used to submit and pay CGT to Revenue. For disposals made between January 1 and November 30, CGT is payable by December 15 of the same year. For disposals made between December 1 and December 31, CGT is payable by January 31 of the next year. A PPS number must be obtained from Revenue for each individual as it is required for making payments and filing tax returns. It is worth noting that it is common practice for solicitors handling the sale of property to request proof of payment of any CGT liability before releasing sale proceeds.

Unfortunately, NPPR fees are not deductible in calculating the taxable gain. You should also check if there is an outstanding Local Property Tax liability associated with the property.

As you are tax resident in Britain, you may also have a British CGT liability on this sale. The Irish CGT paid can be used to reduce or eliminate any British CGT liability.

CGT bill on rental property

Q What would be the Capital Gain Tax (CGT) bill on the sale of a rented property bought in 1998 for €75,000 and sold this year for €175,000 ? Richard, Dundalk, Co Louth

A You mention that you purchased the property for €75,000 but did not specify if this includes any additional costs of acquisition, such as any legal fees or stamp duty. These additional costs of acquisition, along with any enhancement expenditure incurred on the property and costs associated with the sale process (such as legal or estate agent fees) are deductible in calculating the taxable gain. Indexation relief will also apply.

This relief is granted by increasing the purchase price, along with any associated costs of purchase, by an 'indexation factor'.

As a result of this relief, depending on the exact date you acquired the property in 1998, the taxable gain arising on the disposal, after taking account of your CGT personal exemption of €1,270 will be either €81,330 (if acquired before April) or €82,830 (if acquired after April).

The current CGT rate is 33pc, which if applied to the higher amount above would result in a CGT liability of €27,334.

Tax return for saving interest

Q I am a PAYE employee and so have never filed a tax return. However, I have a savings account which earns a small amount of interest each year. I also have a life assurance investment fund savings plan which typically makes an investment return each year. I also have a PRSA to which I contribute to from my salary. Am I supposed to file a tax return for these things? Bob, Naas, Co Kildare

A Income from which tax isn't deducted at source must be accounted for by "chargeable persons" by filing a tax return (Form 11) with the Revenue Commissioners.

Your income consists of deposit interest (which is already taxed at source), a life assurance investment fund (where an exit tax is normally deducted by the life assurance company on payments to investors, thus fully discharging any tax liability) and a PRSA which is contributed to from your salary (and presumably tax relief provided through the payroll). Provided the total deposit interest earned during the years concerned are below certain limits, you are not a "chargeable person" and are not obliged to file a tax return.

The relevant limits which make you a chargeable person are €3,174 for 2014 and 2015 and €5,000 from 2016. If the deposit interest earned by you in the last three years is more than above limits, you must file a tax return to declare the income. As the deposit interest earned has already been taxed at source, the only additional liability due will be PRSI (Pay Related Social Insurance) at 4pc as deposit interest is not subject to the USC (Universal Social Charge).

John Byrne is tax partner with Crowe Horwath (crowehorwath.ie)

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