Guidelines for the amount you can gift or inherit from someone - Limerick financial advisor

Question
Liam, I’m leaving my current employer in November and I’ll be getting a redundancy payment, some of which I’m thinking of using to reduce my mortgage. I owe €253,000 and the term remaining is 26 years. My rate is variable at 3.95% and my current monthly repayment is €1,300. What I’d like to do with the lump sum is to reduce my monthly repayment to €1,000 but I’m not sure how much that will take. Any help would be much appreciated.

Answer
Okay, if you want to reduce your monthly repayment to €1,000 you will need to make a lump sum payment of €58,000.
Because €195,000 at a rate of 3.95% over 26 years equals €1,000.
However, there is another way you can reduce your monthly repayment to €1,000 without it costing you €58,000.
It can be done for €39,000 and let me explain how.
If you were able to reduce your mortgage rate to 3.18% and you absolutely can, the monthly repayment on a balance outstanding of €214,000 over a 26-year term would be €1,000.

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So, you would need to reduce the amount you currently owe from €253,000 down to €214,000 which is a difference of €39,000 and your monthly repayment would be €1,000.
That outlay of €39,000 is obviously a lot lower than €58,000.
Which means the rate you are charged is key and if we put both scenarios alongside each other you will see just how important it is.
You are saving yourself an outlay of €19,000 and achieving exactly the same result.
So, that’s that saving in the short term but when you then compare the total amount of interest you will pay in the long term there’s another big saving.
Because you’ll pay back €16,483 less in interest payments even owing a higher amount so the total net saving to you in total could be as much as €35,483 which is why it makes huge sense for you to consider moving providers to lower your interest rate.
You may not have thought the interest rate would make such an impact and it may not have even crossed your mind thinking it would, but I’m hoping these numbers will make you think again and rather than quickly using some of your redundancy to lower your mortgage, I would consider lowering your rate first and if that means moving providers, so be it. Once you have and you are at that lower rate, then take a chunk off it but it will be a lower amount than if you were to do it now.
And you don’t want to find this out after the fact that it could have been lower.
And if you need help with this or you haven’t the time to do this yourself then I’d engage the services of a mortgage broker who will be able to help you make the switch and show you what is required.

Question
Liam, my wife and I are both in our mid-50’s and we have three children who are all in their 20’s. We have been fortunate over the years to have accumulated significant assets through the sale of a business, two inheritances and also just hard saving on our part. We estimate the value of everything we have is about €3m. We’ve begun to wonder that if anything were to happen to us, our kids would be faced with a large tax bill, and we were wondering if there is anything we could do to mitigate this liability for them. Your advice and guidance would be very welcome.

Answer
The amount you can gift or inherit from someone depends on your relationship with them. There are currently three bands that have different thresholds at which someone can receive monies without incurring any capital acquisition tax liability. And your children fall into Group A, which has an individual threshold of €400,000.
Anything above this amount is taxed at 33% which means that if each of your children were to inherit €1m each, the amount subject to capital acquisition tax (CAT) would be €600,000 which would mean they would have tax liability of about €198,000 and I’m allowing for the small annual allowance each of them would be entitled to when arriving at this number.

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This is just an example of the amount that would be due to Revenue assuming current thresholds, current values of your estate, current CAT tax rate etc. and of course all of these could change in size over time.
Anyway, to answer your question, is there anything that can be done to prevent this from happening?
And the answer is yes.
There is a life assurance policy known as a Section 72 policy which is arranged for the specific purpose of providing funds on death to pay inheritance tax likely to arise from the death of the policy holder(s).
Obviously a life policy like this comes at a cost and if you wanted to put a policy in place to eliminate the total cost of your children’s tax liability right now, then you’d need a Section 72 policy in the amount of €594,000 i.e. €198,000 x 3.
And the cost of such a policy would be €778.57 per month.
If you wanted a policy that covers €494,000 then the cost is €634.19 per month and for €394,000 it would cost €506.32 per month.
These monthly premiums are based on a joint life second death basis and you choosing an index option where the premium increases by 4.5% each year to keep in line with inflation. Although, it’s worth knowing that the sum assured will only increase at 3% per annum.
If you didn’t choose the indexation option, then the monthly cost would always be €778.57 for €594,000 and €634.19 for €494,000 and €506.32 for €394,000 and these premiums are guaranteed and will never change.
Indexation option or not, it’s an expensive monthly outlay but that will depend on how long you live which of course we don’t know but you’ll notice that the benefit far exceeds the premiums paid to secure the sum assured in each instance.
And given the size of your estate may increase further in value it may be prudent to look at effecting this type of policy now when you are young enough to do so because as you get older and your estate becomes more valuable, the cost of taking out such a policy would be so large it could become prohibitively expensive. And I would recommend you protect the future tax liability for your children by choosing the indexation option.
And I have come across many people who are inheriting money from their parent’s estate and the amount they have to give away in inheritance tax is enormous and they only wish their parents knew of or took out such a policy when they were young enough to do so because it would have saved them hundreds of thousands of euros.
And of course there are others who take the view that the amount their children are going to inherit an awful lot anyway with or without paying CAT to Revenue, so whatever your point of view is on this matter will help decide what your course of action should be, but I do believe this is an area you need to give further thought and consideration to.
Two more things.
There is a tax exemption on the inheritance of a property assuming the person inheriting it meets the following criteria:
The property must be the only or main residence of the person who died. This means that it should be where the homeowner lives for the majority of the time.
You must have lived in the house as your primary or only residence for the three years immediately before the inheritance date.
You must not acquire any interest in another house from the same person who provided the inheritance between the inheritance date and the valuation date.
You should not own or have any interest in another house. This requirement ensures that individuals who inherit a dwelling house and seek exemption from Capital Acquisitions Tax (CAT) maintain only one primary residence.
The house must remain your primary or only residence for six years after the inheritance date. This rule doesn’t apply if (a) you’re 65 years of age or older at the time of inheritance (b) you’re compelled to reside elsewhere due to employment or (c) you’re obliged to live elsewhere due to certified mental or physical infirmity.
And the very last thing.
You’re entitled to an annual tax-free gift allowance of €3,000. Which means you can gift this amount each year to each of your children and the amount they accumulate is exempt from the inheritance tax threshold.
So, you and your wife could gift a child €6,000 every year i.e. €3,000 from each of you and if in 10 years’ time you have given them €60,000 and you were to pass away this amount is not subject to CAT tax. It’s separate to whatever the threshold limit at the time is.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie