Do you know about death and inheritance tax?

In recent years one of the most frequently raised financial planning issues has been inheritance tax planning.

Inheritance tax also known as Capital Acquisitions Tax (CAT) was traditionally seen as a problem only for the very wealthy, however this is no longer the case. Successive governments have moved both the tax thresholds and the rate of tax to their current levels. At present there are three inheritance or gift tax thresholds as detailed below.

There are a number of ways to maximise these limits when planning your will. The most effective way to avoid a potentially large inheritance tax bill is by drip feeding the Inheritance while alive by utilising the annual small gift exemption.

Tax legislation allows for an annual exemption for the first €3,000 of any gift taken by a beneficiary from any one donor. This means that a beneficiary can receive up to €3,000 tax free in any one year from any donor, or even multiple donors.

One practical application of this is where parents, grandparents, aunts and uncles gift money to children. Each adult can gift each child up to €3,000 in any year with no tax liability for the child and without reducing the amount the child can ultimately inherit tax free.

Using the will process more efficiently is also good. A standard will is pretty straight forward in that the assets go to the surviving spouse and after that, it is split evenly to the children. Even though the assets are evenly split it does not mean that each child should pay the same level of inheritance tax.

It is possible to use the various thresholds to be tax efficient with your will. You can still divide your estate evenly but you stipulate in your will that your grandchildren and your child's spouse receive an inheritance, which is to come from your child's portion.

If your total estate is €1.5M and it is being divided evenly between two children. One of your children (Child A) is single with no dependents and the other (Child B) is married with 2 dependents. Both can have different inheritance tax liabilities.

You are leaving them a total sum of € 750,000 each. You can construct your will for Child B who is married with 2 dependents by taking account of their spouse and children. Your child will receive €335,000 tax free from you and you can stipulate that their spouse and your 2 grandchildren also receive an inheritance. It will look as follows;

Child A Single with no dependents

Inheritance - € 750,000

Group A Threshold - € 335,000

Taxable Gain - € 415,000

Tax Due - € 136,950

Child B Married with 2 dependents

Group A x 1 - € 335,000

Group B x 2 - € 65,000

Group C x 1 - € 16,250

Taxable Gain - € 333,750

Tax Due @ 33% - € 110,137

Saving € 26,813

Another solution is to put in place a Section 72 life assurance policy. This is a specific type of policy which pays out on the second death of the parents, the level of life cover in place should be equal to the estimated inheritance tax liability. Section 72 of Capital Acquisitions Tax Consolidation Act 2003 states that the proceeds of this type of policy are exempt from tax, as long as those proceeds are used to pay the inheritance tax that arises on death.

l Conor Harte BFS QFA CFP® of Wealthwise Financial Planning with offices in Carrick-on-Shannon, Co Leitrim & Oranmore, Co Galway, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141