How to manage tax bill on cottage inherited from aunt
Q
I INHERITED a thatched cottage from my aunt. The cottage is worth about €150,000, so I understand I’m facing an inheritance tax bill of around €40,000. I don’t have that kind of money. I’m keen to hold onto the cottage, as I spent many summers there as a child. Would it be possible for me to repay Revenue the tax bill over 10 to 15 years? Or do you have any other suggestions on how I could manage the tax bill? Niamh, Co Kildare
UNFORTUNATELY, due to the fact that no agricultural or business assets have been transferred to you, it appears that you won’t qualify for either agricultural or business tax relief. (Agricultural relief reduces the market value of a gift or inheritance of agricultural land or property while business relief reduces the taxable value of gifts or inheritances of business property.) Your inheritance will be fully taxable as a result.
Neither will you qualify for the favourite nephew or niece relief, which could treat you as a child for the purposes of Capital Acquisitions Tax (CAT — the tax due on gifts or inheritances) and thus allow you to inherit up to €335,000 tax-free. There are a number of conditions that must be met to qualify for the favourite nephew or niece relief — including that you would have worked for your aunt in the five years immediately preceding your receipt of the inheritance and that the asset inherited was used in that business. You don’t appear to meet either of these conditions.
Under CAT rules, a certain amount of gifts or inheritance is exempt from tax. The non-taxable amount is known as the group threshold. Any inheritances or gifts received by a niece or nephew from an aunt fall under the Group B threshold, which is €32,500 for any gifts or inheritances received on or after October 9, 2019. This is a lifetime threshold — so any previous gifts or inheritances received within the same group must be aggregated. Any benefit exceeding your group threshold of €32,500 will be subject to CAT at 33pc.
In the case of what is termed a real property (that is, land or buildings), tax due may be paid by monthly instalments over a period not exceeding five years (60 equal monthly instalments). Interest on an unpaid balance will be added to each instalment. Such a method is available when you complete your self-assessment tax return. The first payment is due and payable on October 31 immediately following the valuation date.
The valuation date for an inheritance is the earliest of either the date the executor or administrator can receive the inheritance to give it to you; the date the executor or administrator actually receives the inheritance to give it to you; or the date the executor or administrator gives the inheritance to you.
The valuation date also determines when you need to pay the tax due. Where the valuation date is between January 1 and August 30, the deadline is October 31 in that year; where the valuation date is between September 1 and December 31, the deadline is October 31 in the following year.
Another option is available to you in the way of non-statutory instalments. This is granted on a concessionary basis in exceptional circumstances, where the tax liability cannot be paid without causing excessive hardship. To enquire as to whether you can avail of this, contact the Revenue Commissioners.
Tax & NI house transfer Q
MY wife and I transferred ownership of a house in Northern Ireland to our two children in 2003. We paid Capital Gains Tax (CGT) at the time — the market valuation then was €80,000. What implications are there in relation to Capital Acquisitions Tax (CAT) and stamp duty of this transfer? All four of us are and have always been resident in the Republic of Ireland. The deed of transfer was done in Northern Ireland. Tom, Co Louth
THE transfer you made to your children is called a gift for CAT purposes. A gift is within the charge to CAT if the property you transferred is an Irish property or either you or your children are Irish residents. Where the gift is taxable, the beneficiary (such as your children) are liable to tax.
However, depending on the relationship between the disponer (that is, the individual who provides the gift) and the beneficiary, some benefits may pass without a tax liability. Under CAT rules, a certain amount of gifts or inheritance is exempt from tax. The non-taxable amount is known as the group threshold. The transfer between parents and children falls under the Group A threshold for CAT, which is €335,000 for any gifts received on or after October 9, 2019. This is a lifetime threshold and any previous gifts or inheritances received within the same group must be aggregated.
The small gift exemption of €3,000 a year is also available to all of your children from both parents — bringing the total value of that exemption to €6,000 a year per child. The small gift exemption reduces the market value in order to determine the taxable value that is to be covered by any unused CAT group threshold.
If there is still a taxable amount after the small gift exemption and the group threshold is used, any CGT paid on the transfer could be used as a credit against any CAT. It should be noted that the CGT credit will be clawed back where the beneficiary disposes of the property within two years after the date of the benefit.
A treaty between Ireland and the UK covers CAT in Ireland and the UK. So assuming any tax is paid in the UK, and there is still CAT in Ireland, a credit can be used at whichever is the lower of the UK and Irish tax-effective rates, but the credit cannot be greater than the Irish tax paid.
It should be noted that in general, there is no tax due on gifts in the UK — if the disponer survives for at least seven years after the gift and the gift they give away is more than £325,000.
No Irish stamp duty is due on the transfer of your UK property, as it does not fall under the charge of Irish stamp duty. UK stamp duty is normally not due on any gifts made without a consideration (that is, without a payment or reward) or on an outstanding mortgage.
In short, based on the information you have provided, and if your children have not had prior taxable benefits under the Group A threshold, then this transaction should not give rise to any CAT liability for your children.
If we look at the numbers: the property is worth €80,000, so that’s essentially a gift of €40,000 per child. Each child could use the small gift tax exemption from the first parent (worth €3,000), and the small gift exemption from the second parent (also worth €3,000). This leaves the taxable value of the gift at €34,000. So assuming no other gifts or inheritances have been received under the Group A threshold of €335,000, no CAT liability will arise.
However, if your children have used any part of their threshold, this calculation will need to be adjusted accordingly. It should be noted that if they use more than 80pc from their group threshold, a tax return must be filed.
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