How do I protect my child from tax burden?
QI have an Approved Retirement Fund (ARF) valued at €20,000. I plan to will it to my special needs daughter. I am anxious to know what tax she would pay on that amount when she receives it after my death. Her only income is her disability allowance. John, Co Dublin LOOKING at the regulations, a distribution from an ARF on death to a child is subject to income tax at a rate of 30pc or Capital Acquisitions Tax (CAT) at a rate of 33pc — depending on the age of the child. If the child is over the age of 21, income tax applies; if the child is under the age of 21, CAT applies.
However, given the specific circumstances of your daughter, you are likely to have to make provision for her to receive assets from your estate through some form of trust structure which will require the trustees to manage her affairs for her lifetime. This is where, unfortunately, the ARF rules are not so advantageous.
When a distribution of the ARF is made on death to a trust set up for a child for protective reasons, it is treated as a full distribution by the deceased in the year of death and the Qualified Fund Manager (QFM) must operate income tax at the marginal rate on the distribution. The distribution received by the trust is net of the tax deducted, which adversely affects children with special needs where assets are held for them in a trust structure.
Late pension starter
QI am 54 years of age and have been self-employed for the last 20 years. I’ve neglected my pension and so now need to concentrate on creating one for myself. My accountant said I’ll need to put in at least half of my €90,000 annual income for the next 10 years to have a modest income in retirement. However, I’m being told that the tax relief rules don’t allow for latecomers like me. Is that true and, if so, what can I do? Eric, Co Louth AS a sole trader, you can make pension provision via a personal pension contract or Personal Retirement Savings Account (PRSA). Personal pension contributions are deductible for income tax at the marginal rate — up to annual age and earnings-related limits in each tax year.
Based on your current age and income, you can make a maximum tax relievable contribution of €27,000, which will increase to €31,500 from age 55 and €36,000 form age 60.
The limits apply to all pension contributions in respect of any pension plan to which an individual may contribute.
It is possible to back-date a contribution to the previous tax year, provided the contribution is made prior to October 31 in the current tax year (or mid-November where you are filing your tax return online).
Based on the contribution amounts outlined above, it will be difficult to achieve a sufficient fund to provide even a replacement income of 50pc in retirement. You would need to accumulate a fund of circa €1.5m to achieve that.
One option to consider would be to incorporate your business. The ability to fund for pension purposes through a corporate pension is significantly greater. Contributions are calculated based on years of service and salary and are deductible against profits for corporation tax.
You are entitled to fund a pension of up to two-thirds your final salary, which provides you with a much better chance of achieving a sustainable income in retirement compared to the contributions allowable as a sole trader. In addition, it is possible to make special lump sum contributions to your pension at any time (subject to Revenue Commissioner limits).
Many business owners establish a one member corporate pension arrangement commonly known as an SSAP, which would give you control of how you tailor the management of your pension over the 10-year period and control the cost.
British pension and Brexit
QI am a 53-year-old Irish citizen with a private pension here in Ireland. I also have a pension in England, which was set up in the late 1980s when I lived there. Since 1992, I have not been contributing to this pension as I am no longer resident there. However it has performed well in the intervening years and is now worth in total about £70,000 (¤78,000). Should I transfer the total amount into my Irish pension before Brexit happens? Niall, Dublin IT is difficult to say what impact Brexit will have on UK pensions and if it will restrict portability of UK pensions benefits in the future. However, you do have options to consider.
The minimum retirement age in the UK is 55 so, given your age, you do not have long to wait to be in a position to draw down your benefits from the UK pension. You should be able to access a 25pc tax-free lump sum and you can either draw down further income at your discretion or elect to receive the balance as a taxable lump sum. You should seek advice on the tax treatment of transferring the proceeds of a UK pension into Ireland but it should only be taxed in Ireland based on the UK/Ireland Double Taxation Agreement (DTA).
The alternative is to transfer these benefits out of the UK to a Recognised Overseas Pension Scheme (ROPS), formerly known as a Qualified Recognised Overseas Pension (QROPS). A (Q) ROPS is an overseas pension scheme that the British tax authority, HM Revenue and Customs (HMRC), recognises as eligible to receive transfers from registered pension schemes in the UK.
First things first, you need to source a UK regulated adviser to give clear advice on your options and to set out the pros and cons of transferring.
Assuming you are satisfied with the advice and wish to proceed, you need to find a (Q)ROPS provider in Ireland. There are number to choose from. Once you have chosen the Irish provider, you will need to request transfer documentation from the UK provider and it will co-ordinate the transfer to your (Q)ROPS. PRSAs and buy-out bonds are common Irish (Q)ROPS structures.
There are few important points that need to be considered when transferring to a (Q)ROPS. The HMRC introduced a 25pc overseas transfer charge to any pension transfer from the UK to a (Q)ROPS requested on or after March 9, 2017, unless one or more of the following five exceptions applies: that both the individual and the (Q) ROPS are in the same country after the transfer; that both the individual and the (Q)ROPS are within the European Economic Area (EEA); that the (Q)ROPS is an occupational pension scheme sponsored by the individual’s employer; that the (Q)ROPS is an overseas public service pension scheme and the individual is employed by one of the employers participating in the scheme; and that the (Q)ROPS is a pension scheme established by an international organisation to provide benefits in respect of past service and the individual is employed by that organisation.
No charge would apply in your circumstances as you meet the first exception. The UK legislation also provides that the 25pc tax charge will apply to a tax-free transfer if, within five full UK tax years, your circumstances change so that the exemptions would not have applied to the transfer — for example, if you become resident in a country outside the EEA.
In terms of retirement benefits, these benefits are subject to Irish rules and tax treatment. The value of the benefits accumulated in the UK will not count towards your Standard Fund Threshold. However, your lump sum benefits are subject to the €200,000 tax-free limit.