How To Avoid Gift and Inheritance Tax in Ireland
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Inheriting property or assets or receiving a gift may lead to the imposition of inheritance tax, also known as Capital Acquisition Tax (CAT). This can be a significant financial burden, catching you off guard.
With some careful planning and a comprehensive understanding of the options available to you, it is possible to minimise or even avoid inheritance tax altogether.
Effective inheritance planning is a crucial aspect of financial planning, and our team is here to provide tailored advice based on your specific goals and needs. Get in touch today!
Spousal Exemption
The spousal exemption offers a crucial benefit to individuals who receive gifts or inheritances from their spouses or civil partners.
According to the regulations governing Capital Acquisitions Tax (CAT), any such gift or inheritance is granted full exemption.
This means that you can receive assets from your spouse or civil partner without incurring any liability for CAT.
Favourite Nephew or Niece Relief
Eligibility for the Favourite Nephew or Niece Relief may be applicable when you receive a gift or inheritance specifically involving business assets.
To be eligible for this favourable treatment, a niece or nephew must meet specific criteria.
Only one nephew or niece can benefit from this rule, and they must have dedicated the last five years to working for either you or your spouse. During this period, they are required to have actively contributed a minimum of 15 hours per week for a small business or 24 hours per week for larger enterprises.
If these conditions are met, the niece or nephew, falling under Group A for Capital Acquisitions Tax, is granted an increased threshold of €335,000 for gifts and inheritances, reflecting the recognition of their substantial commitment to the family business.
Learn more by reading our article Favourite Nephew/Niece Relief: Inheritance Plan for Business Owners.
Make Use of Small Gift Exemption
The annual small gift exemption allows you to gift up to a certain amount to an individual tax-free. The small gift exemption can be a valuable tool for those looking to distribute their wealth strategically.
It can also be the ideal strategy for building up funds to be used at some point in the future, whether it be assisting your child in acquiring their first home or contributing to the financing of your children’s education.
Anyone may receive a gift up to the value of €3,000 from any person in each calendar year without having to pay Capital Acquisitions Tax (CAT). Moreover, this doesn’t have to be in a single transaction; you have the flexibility to, for example, receive 10 payments of €300.
If you receive gifts from multiple individuals in the same calendar year, the first €3,000 from each person is excluded from Capital Acquisitions Tax (CAT).
It’s important to note that this exemption does not extend to inheritances. If the disponer gives you a present and dies within two years, that gift is no longer eligible for the small gift exemption since it becomes an inheritance.
Explore a tax-free way to support your children in covering their mortgage deposit.
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Dwelling House Exemption
If you meet specific requirements, you are not required to pay Capital Acquisitions Tax (CAT) on the inheritance of a dwelling house.
Should you qualify as a dependent relative, this exemption extends to include the gift of a dwelling house, provided that certain conditions are satisfied.
Qualifying conditions for inheritance:
You qualify for an exemption from Capital Acquisitions Tax (CAT) on the inheritance of a dwelling house if, at the time of inheritance:
- The house was the only or primary residence of the deceased (with the exception if you’re a dependent relative).
- You resided in the house as your only or main home for the 3 years immediately preceding the inheritance date.
- You do not possess ownership or any interest in another house.
- There is no acquisition of interest in any other house from the same disponer between the inheritance date and the valuation date.
- The inherited house remains your only or main residence for 6 years after the inheritance date. However, this does not apply if you are aged 65 or over at the time of inheritance, are required to live elsewhere due to employment, or are compelled to reside elsewhere due to certified mental or physical infirmity by a doctor.
Qualifying conditions for a gift:
Exemption from Capital Acquisitions Tax (CAT) is granted upon receiving a gift of a dwelling house if, at the time of the gift:
- You qualify as a dependent relative of the donor, being either permanently and totally incapacitated by mental or physical infirmity or aged 65 years or over at the date of the gift.
- The house was your main residence for the previous 3 years.
- You do not possess ownership or any interest in another house.
Discover how to use Dwelling House Relief to effectively avoid inheritance tax on your family home.
Agricultural Relief
Receiving a gift or inheritance of agricultural property could make you eligible for Agricultural Relief, potentially reducing the taxable value of the property, including land, by 90%. However, specific conditions apply to qualify for this relief.
To meet the criteria for Agricultural Relief as a farmer, your agricultural property must constitute a minimum of 80% of your total property value on the valuation date, a condition commonly known as the ‘Farmer Test.’
However, this requirement does not apply if the agricultural property is exclusively comprised of trees and underwood.
For gifts and inheritances executed after January 1, 2015, where the valuation date aligns with or falls after January 1, 2015, you must adhere to the following:
- Engage in farming the agricultural property on a commercial basis for at least six years from the mentioned date.
OR
- Lease the property to an individual who operates the agricultural property commercially for a minimum of six years from that date.
In cases where the agricultural property in your gift or inheritance does not meet the criteria for Agricultural Relief, it might still qualify for Business Relief.
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Retirement Relief
Retirement relief, a type of Capital Gains Tax (CGT) relief, is a financial benefit extended to individuals aged 55 or older when they sell or transfer (including by gift) their ‘qualifying assets’ associated with a business.
These assets encompass various components, such as family firm assets or those used in a trade (such as premises, goodwill, or farming land), as well as shares in a family-owned company.
The term ‘retirement’ doesn’t imply that you must retire to qualify for the relief.
This relief holds the potential to completely eliminate your CGT tax liability arising from the sale of these assets, contingent upon meeting specific requirements.
In essence, retirement relief can result in a 100% reduction of this tax, exempting you from any CGT payment.
Delve deeper into the details by exploring our comprehensive article, Tax-Efficient Planning: Retirement Relief in Business Asset Disposals.
Business Relief
In the event of inheriting a business, you may be eligible for business relief, which has the potential to reduce the value of the qualifying business by up to 90% when transferred to a beneficiary.
To qualify for this relief, the beneficiary is required to retain ownership of the business for a minimum period of six years and adhere to specific conditions. Failure to meet these stipulations could result in a clawback of the relief.
If you find yourself facing such circumstances, get in touch with one of our financial advisors at True Wealth.
Additionally, read our article, How Business Relief Can Help You Reduce Gift or Inheritance Tax.
Section 72 Life Insurance Policy
This life insurance policy is designed to offer protection for your family against the burden of inheritance tax. Upon your death, the plan ensures a cash payment, providing your family with the means to settle any resulting tax obligations.
The proceeds from this life insurance policy are exempt from inheritance tax, provided they are used specifically to cover the inheritance tax liabilities incurred at that time.
To be eligible for Section 72 cover, certain key criteria must be met:
- The individual who owns the plan is responsible for paying the premiums.
- A joint-life plan is permissible only for married couples or registered civil partners.
- The plan holder must commit to paying the premiums for at least eight years to qualify for the specified benefits.
Plan Inheritance Early With True Wealth
Proactive planning is key to successfully navigating the complexities of gift and inheritance tax in Ireland.
By taking a strategic approach and considering your unique circumstances, we at True Wealth can help you navigate the complexities of the tax landscape.
We at True Wealth are experts in personal and business financial planning, retirement and pension planning, pension tracing, savings and investments, protection, mortgages, and wealth management.
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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.
