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Inheritance Planning. – Financial Advice

Inheritance Planning

An inheritance can change a person’s life for the positive. In some instances, inheritance can be received tax-free but there are other scenarios where there will be a tax liability. In many cases an inheritance will be potentially subject to Capital Acquisition Tax (CAT). This is determined by the amount you inherit and the relationship you have with the deceased. You can receive gifts and inheritance up to a set value over your lifetime before having to pay this tax but once it goes over a certain threshold, then you are required to pay at a tax rate of 33%.

As it currently stands in 2021, the threshold is as follows:

Group A – From a parent to a child – €335,000

Group B – A parent, brother, sister, niece, nephew, grandparent, grandchild, linear descendant/ancestor – €32,500

Group C – All other cases – €16,250

If you have made a will and are planning on leaving a property or lump sum to a child, close relative or friend, then one way to counteract some of the CAT is to set up a Section 72 policy. It is a Whole of Life insurance policy which can be used to pay a future inheritance tax bill, which may be incurred by your loved ones in the event of your death. The policy holder must be the person who is leaving the inheritance.

The main benefit of this policy is to make the inheritance process as simple as possible. Where a property is being inherited and its value is above the allowed threshold, the proceeds from this policy will save your loved ones from having to pay out a tax bill from their own pockets or even be forced to sell the property to cover the tax bill. For example, a house worth €500,000 left to one child will mean a tax amount of €54,450.

Another option for portioning out an inheritance is to gift a child up to €3,000 tax-free using the small gift exemption. This means they may take a gift from several people in the same calendar year up to €3,000 but be exempt from CAT. This small gift exemption applies only to gifts and not to inheritances.

Where a parent may want to gift a substantial asset to a child in the future, then the gift would be taxed as above. An option to prepare for this tax bill is to set up a Section 73 policy. This is a savings policy which can be used to pay gift tax. It must be set up specifically for this purpose and premiums must be paid into the savings plan for at least 8 years.

Have a question? #JustCallOran on 087 6686624.

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