DEAL­ING WITH IN­HER­I­TANCE TAX BILLS

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE -

Should you be buy­ing a Sec­tion 72 life as­sur­ance pol­icy to cover fu­ture in­her­i­tance tax bills, do the maths be­fore­hand, ad­vises Nick Mcgowan, direc­tor with the life in­sur­ance bro­ker Lion.ie.

“To­tal up the value of all the as­sets that will form part of your es­tate — in­clud­ing prop­erty, in­vest­ments, cash and any­thing of value,” said Mcgowan.

“Let’s say, this comes to €1.2m and you have three chil­dren who will re­ceive an equal share of €400,000. Their tax-free thresh­old is €320,000 each, leav­ing a tax­able in­her­i­tance of €80,000 per child. This is taxed at 33pc, giv­ing each child an in­her­i­tance tax li­a­bil­ity of €26,400, or a to­tal li­a­bil­ity of €79,200 for all three.

“You could there­fore take out a Sec­tion 72 plan for €79,200. The pro­ceeds would be used to pay their in­her­i­tance tax li­a­bil­ity so your or abroad. Even a part share in an­other dwelling prop­erty, how­ever small the share, would make you in­el­i­gi­ble for the ex­emp­tion. This could catch many un­mar­ried cou­ples out: with re­la­tion­ships of­ten form­ing later on in life, peo­ple some­times hold onto prop­er­ties they had bought be­fore they met, and moved in with, their part­ner.

“Many peo­ple think that co­hab­it­ing cou­ples have the same rights as mar­ried peo­ple,” said Michael Gaffney, a tax ex­pert with KPMG. “In the area of in­her­i­tance tax, this is gen­er­ally not true. There are lim­ited cases where a co­hab­it­ing part­ner might be treated sim­i­lar to a spouse. This can oc­cur where a court or­der has been made award­ing them money or as­sets. Oth­er­wise, to get the tax ex­emp­tion for gifts or in­her­i­tance be­tween spouses they must be mar­ried.”

There is a re­dress scheme in place for co­hab­it­ing cou­ples which can pro­vide pro­tec­tion for a fi­nan­cially-de­pen­dent mem­ber of the cou­ple if the re­la­tion­ship is long-term and ends ei­ther through death or sep­a­ra­tion — but only if the in­di­vid­ual is el­i­gi­ble for re­dress un­der the scheme.

Where a court or­der is made to trans­fer prop­erty to a co­hab­it­ing part­ner un­der that scheme, there should be no Cap­i­tal Gains Tax, gift or in­her­i­tance tax li­a­bil­ity for ei­ther part­ner as a re­sult of the trans­fer (though some CGT may be payable if the prop­erty is sold at a later date).

Co­hab­it­ing cou­ples who have chil­dren should note that a child can in­herit up to €320,000 taxfree from his or her par­ents. chil­dren get the full value of their in­her­i­tance.”

Mcgowan ad­vised mar­ried cou­ples to ar­range Sec­tion 72 poli­cies on a joint life, se­cond death ba­sis. “By do­ing this, on the first par­ent’s death, the as­sets will pass to the sur­viv­ing spouse tax-free,” said Mcgowan. “On the se­cond par­ent’s death, the Sec­tion 72 pol­icy will pay out to cover the kids’ in­her­i­tance tax li­a­bil­ity.”

The cost of a Sec­tion 72 pol­icy will de­pend on age, health, the size of the in­her­i­tance tax li­a­bil­ity you wish to pro­vide for, and whether or not you are a smoker. You could, for ex­am­ple, pay €134 a month for a pol­icy which cov­ers an in­her­i­tance tax bill of €100,000 — if you’re a 50-year-old non-smoker when you first buy the pol­icy.

Be sure to meet the tax rules around any Sec­tion 72 plan you buy. “The plan must be set up for the pur­pose of pay­ing a fu­ture in­her­i­tance tax bill from in­cep­tion as there are spe­cific rules about

No mat­ter how strong your views are against mar­riage, when it comes to in­her­i­tance, you could make your — or your part­ner’s — life much eas­ier by get­ting mar­ried or en­ter­ing a civil part­ner­ship.

“Mar­riage is the best op­tion from an in­her­i­tance tax per­spec­tive — if it’s an op­tion,” said Casey Gre­han. “Fail­ing that, the cou­ple could take out a life as­sur­ance pol­icy.” Such life as­sur­ance poli­cies, known as Sec­tion 72 plans, are de­signed to help peo­ple pay fu­ture in­her­i­tance tax bills.

Cou­ples who have got mar­ried or di­vorced abroad should check what their in­her­i­tance rights are — and where they stand on in­her­i­tance tax. “As peo­ple travel a lot more now, you can have spouses who have been mar­ried, or di­vorced, un­der the laws of other coun­tries,” said Gaffney. “Oc­ca­sion­ally this can lead to un­pleas­ant sur­prises if it turns out that a mar­riage is not recog­nised un­der Ir­ish law ei­ther be­cause there is in­suf­fi­cient of­fi­cial ev­i­dence, or be­cause some for­eign di­vorce is not recog­nised in Ire­land — thereby cast­ing doubt on whether a sub­se­quent mar­riage can be recog­nised.”

If your mar­riage is not recog­nised in Ire­land, you can ex­pect to be treated as strangers for the pur­poses of in­her­i­tance tax, and could face a large tax bill as a re­sult, ac­cord­ing to Casey Gre­han. what poli­cies can be used for these pur­poses,” said a spokesman for AIB. “There are a num­ber of Rev­enue rules around these poli­cies.” Should you be a fac­ing a crip­pling in­her­i­tance tax bill, you may be able to take out a loan to cover the bill. This could be use­ful if you would like to hold onto a prop­erty you in­her­ited, rather than sell it to set­tle the tax bill it trig­gered.

Most banks — in­clud­ing AIB, Bank of Ire­land and KBC — of­fer loans to cover in­her­i­tance tax bills (as long as you can af­ford the re­pay­ments). The size of the loan, as well as the lender, will typ­i­cally de­ter­mine whether you can take it out as a per­sonal loan or as a mort­gage. As well as un­der­stand­ing and pre­par­ing for the they had been in a po­si­tion to move out in the first place. Where the prospects of a child ever buy­ing their own home are slim, the par­ents may con­sider leav­ing the fam­ily home or other prop­erty to that child.

One of the big­gest dilem­mas fac­ing par­ents to­day is whether or not they should pass on such prop­erty as gifts to the next gen­er­a­tion while they are still alive — or if they should wait un­til they have died be­fore the in­her­i­tance is passed on.

For tax rea­sons, it is of­ten wiser to wait un­til you have died to pass on prop­erty. This is par­tic­u­larly true of the fam­ily home.

Let’s say, for ex­am­ple, that you have an adult child who re­cently moved back into the fam­ily home. Un­der the tax-free thresh­olds for Cap­i­tal Ac­qui­si­tions Tax (also known as gift and in­her­i­tance tax), a child can get gifts or in­her­i­tances of up to €320,000 tax-free from his par­ents over his life­time.

“This tax-free thresh­old fig­ure has not kept pace with house price in­fla­tion, par­tic­u­larly in cities, so it is pos­si­ble that even for a mod­est house there could be sub­stan­tial in­her­i­tance tax bill when the fam­ily home is passed on to chil­dren,” said Gaffney.

When a child in­her­its a prop­erty worth more than €320,000 from his par­ents, the ex­cess over €320,000 is taxed at 33pc.

The dwelling house ex­emp­tion could make it eas­ier for you to pass the fam­ily home onto your child tax-free. Be sure to check, and meet, the con­di­tions of this tax break though: the rules in­her­i­tance tax bills which might arise for ei­ther part­ner, co­hab­it­ing cou­ples should get up to speed on their in­her­i­tance en­ti­tle­ments.

“It is very im­por­tant for co­hab­it­ing cou­ples to draw up a will,” said Oon­agh Casey Gre­han of Fagan & Part­ners. Oth­er­wise, if you die with­out mak­ing a will, your part­ner is likely to have no right to any share of your es­tate, apart from what was held jointly — no mat­ter how long you have been liv­ing to­gether.

By con­trast, in a mar­riage or civil part­ner­ship, the sur­viv­ing spouse or civil part­ner has a le­gal right to a share of a spouse’s es­tate when he or she dies, re­gard­less of what was out­lined in the de­ceased’s will.

Un­mar­ried cou­ples should also get ad­vice around the re­dress scheme for co­hab­it­ing cou­ples as not ev­ery­one qual­i­fies for re­dress un­der this scheme. around the dwelling house ex­emp­tion were tight­ened up in re­cent years so it has be­come harder for chil­dren to use it to in­herit homes tax-free. For ex­am­ple, to in­herit the home taxfree un­der that ex­emp­tion, your child must have lived con­tin­u­ously in your home for at least three years be­fore your death — and your home must have been your child’s main or only res­i­dence dur­ing that time.

Fur­ther­more, the ex­emp­tion can only be claimed for a prop­erty which was the prin­ci­pal pri­vate res­i­dence of the donor at the time of the donor’s death. So in most cases, the dwelling house ex­emp­tion can now only be used for in­her­i­tances.

The only way that this ex­emp­tion can be used to pass on the fam­ily home tax-free to a child while the par­ents are still alive is where the child is a de­pen­dent rel­a­tive (due to a phys­i­cal or men­tal in­fir­mity).

“An­other prob­lem with the trans­fer­ring of the fam­ily home by the par­ents while they are still alive is that they [the par­ents] could be sub­ject to CGT if the prop­erty has gone up in value since they bought it,” said Gaffney. “CGT ap­plies at a rate of 33pc of the in­crease in value. How­ever, CGT does not ap­ply if the house passes on death — that is, by way of in­her­i­tance.”

Most of us don’t like to think about death — or the con­se­quences of it. How­ever, ad­dress­ing death — and do­ing what you can to limit, or pre­pare for, the taxes it can trig­ger — can make a big dif­fer­ence to those who sur­vive you.

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