INHERITANCE TAX / CAPITAL ACQUISITIONS TAX

Inheritance Tax is a form of death duty which applies at the rate of 20% of the value of a benefit received on the death of a testator. In other words, it is a tax on the property and other assets that people receive from you, when you die. Everyone is allowed to inherit a certain amount without any tax being payable - but above this figure, they will be required in law to pay tax on any inheritance they receive. There are three tax classes into which the recipients fall: Class A: a child or parent of the testator may inherit £300,000 tax-free, Class B: each of the testator's grandparents, brothers, sisters, nephews, nieces or grandchildren may inherit £30,000 tax-free, Class C: anyone else (including common law partners) may inherit £15,000 tax-free.

Probate Tax applies at a rate of 2% to the net value of the deceased person's estate. It only applies if the taxable value of the estate is greater than £40,000.

 

The person providing the property is the disponer (or donor in the case of a gift). In the case of property acquired under a Will, the testator will be the disponer. The person who receives the property under the Will is the beneficiary.

The Capital Acquisitions Tax Code contains a number of exceptions and relief's:

(1) Small Gift Exemption.
(2) Charitable Gifts.
(3) Heritage Items.
(4) Agricultural Relief.
(5) Business Relief.
(6) Principal Private Residence / Family Home.
(7) Government Securities (Bonds).
(8) Insurance Policies.
(9) Spouses.
(10) Favourite Nephew / Niece Relief.
(11) Brother / Sister Relief.
(12) Minor Child of a Deceased Child.
(13) Parents.
(14) Relief for Permanently Incapacitated Individuals.

(1) Small Gift Exemption: From January 1st 1999 where a donee receives a gift the first £1000 will be exempt from CAT.

(2) Charitable Gifts: a benefit taken for public or charitable purposes is exempt from CAT provided that the Revenue Commissioners are satisfied that the gift will be applied for a purpose regarded as charitable under Irish law.

(3) Heritage Items: An individual who receives a gift or an inheritance of objects or property (including books, manuscripts, jewelry, scientific collections, works of art, and other non-trading items) of national scientific, historical or artistic interest may claim an exemption from CAT. A disposal of such property which has been on loan to an approved gallary or museum for six years will be totally exempt from tax provided that it a worth of at least £25,000. The exemption will be withdrawn if the item has not been on display to, or accessible by, the public or recognised bodies for a reasonable period during each of the six years.

(4) Agricultural Relief: Section 19 of the Act provides a relief in respect of gifts of inheritances of certain agricultural property provided certain domicile, residence and property conditions are fulfilled by the donee or successor. The relief is given by reducing the market value of the property by a certain percentage.

The property which qualifies for the relief includes (a) agricultural land, pasture, wood lands situate in the State and crops, trees and underwood, (b) livestock, farm machinery, blood stock situate on such land, and (c) farm buildings, farm houses and mansion houses.

In order for the donee or successor to qualify for the relief, he must be domiciled in the State and must be resident in the State in each of the three tax years following the date of the gift.

Not less than 80% of the market value of all the property to which the donee is beneficially entitled in possession after he has taken the gift or inheritance must represent agricultural property as described above. An individual within the above definition will be termed a farmer.

Where a donee or successor receives a gift or inheritance subject to the condition that it is to be invested in agricultural property then the gift or inheritance will qualify for agricultural relief provided that the condition is complied with within two years of receiving the gift or inheritance.

A clawback exists whereby the relief may be withdrawn if the property is disposed of within six years and not replaced with additional agricultural property within one year from the date of disposal (or compulsory acquisition).

The relief at the moment amounts to a reduction of the market value of the property by 90%, so that the donee or successor will only be liable to CAT for 10% of the property's value.

(5) Business Relief: If the testator wishes to leave a business to a particular beneficiary he may avail of business relief. The relief consists of a 90% reduction in the taxable value of relevant business property so that the beneficiary is only taxed on 10% of the business's value. The following are regarded as relevant business property for the purposes of business relief: (a) a business or an interest in a business carried on primarily in the State, (b) unquoted Irish company shares which give their absolute owner (beneficiary) control or more than 25% of the voting rights, (c) unquoted shares in a private Irish company which is controlled by the beneficiary, (d) unquoted Irish company shares outside (b) or (c) which give their absolute owner control of 10% or more of the company's entire share capital (provided that the beneficiary has worked full time in the company for the five years preceding the gift or inheritance), (e) land, buildings, machinery or plant situated in the State and used by a company controlled by the disponer, or by a partnership of which the disponer was a partner, (f) quoted shares or securities of an Irish company carrying on business wholly or mainly in the State and which were owned by the disponer before they became quoted and would qualify under (b), (c) or (d) but for the fact that they are quoted.

For the relief to apply, the relevant business property must have been owned by the disponer, or by the disponer and the disponer's spouse, for at least five years prior to the relevant transfer, of for at least two years in the case of an inheritance taken on the disponer's death.

Again, a clawback exists whereby the relief may be withdrawn if the property is disposed of within six years and not replaced with additional business property within one year from the date of disposal (or compulsory acquisition).

(6) Principal Private Residence / Family Home: Section 130 of the Finance Bill 2000 inserts a new section 59C into the Capital Acquisitions Tax Act, 1976. It provides that gifts or inheritances of a dwelling-house taken on or after 1 December, 1999 will be exempt from CAT provided the following conditions are satisfied: (a) the beneficiary must have lived continuously in the house as his only or main residence for three years prior to receiving the gift. Where the dwelling house has been replaced the beneficiary must have lived in both properties as his main residences for three out of the four years prior to the receipt of the gift. (b) The beneficiary must not own or hold an interest in any other dwelling house at the date of the inheritance. (c) The beneficiary must continue to live in the dwelling house as his only or main residence for six years commencing on the date of inheritance.

(7) Government Securities (Bonds): Government securities or Gilts are generally exempt from Capital Acquisitions Tax. If Government Securities are received by a donee or beneficiary who is neither domiciled or ordinarily resident in Ireland they will be exempt from CAT if the securities were held by the disponer for a period of three years prior to the date of inheritance or gift. This is a tax efficient method of giving assets to a child living abroad who has acquired a foreign domicile. On the other hand, if the disponer is not domiciled or ordinarily resident in Ireland, there is no minimum holding time required.

(8) Insurance Policies: Life Assurance policies taken out to pay the inheritance tax due on your death (called section 60 policies) are exempt from inheritance tax, provided that the proceeds are used to pay the tax due. If the policy provides more money than is needed to pay the inheritance tax due, the excess will be taxable. The Will of a surviving spouse should specify that the proceeds are to be applied to this purpose so as to ensure that the wishes of the insured are met and that the monies due under the policy do not form part of his taxable estate. One should ensure that the policy provides for the contingency of simultaneous death.

(9) Spouses: All inheritances between spouses after 31st January 1985 are exempt from Capital acquisitions tax. Similarly, all gifts between spouses from 31st January 1990 are exempt from capital acquisitions tax. Property passed from one spouse to another in accordance with a court approved separation agreement is also exempt from tax.

(10) Favourite Nephew / Niece Relief: Schedule II of the Capital Acquisitions Tax Act deems a nephew or niece to be a child of the disponer for the purposes of computing tax on a gift or inheritance provided certain conditions are met. As a result, the nephew or niece will be entitled to claim a tax-free amount or threshold amount normally applicable to a child of the disponer instead of the reduced amount normally applicable to a nephew or niece. The conditions are that the donee is (1) a child of a brother or sister of the donor, (2) who has worked substantially on a full time basis for five years ending on the date of inheritance while carrying on or assisting in the trade, business or profession of the donor or the work of or connected with the office or employment of the doner. The meaning of working substantially on a full time basis has been defined as working more than fifteen hours per week.

(11) Brother / Sister Relief: This relief applies where the inheritance consists of a house or part of a house and is taken by a brother or sister who, at the date of the inheritance has attained the age of 55 years, and has lived with the disponer continuously for a period of not less than five years (ending at the date of inheritance), and who was not beneficially entitled in possession to another house. The relief is that the estimated market value of the house is reduced by the lesser of 80% or £150,000.

A close relative relief exists which is similar to the brother sister relief except that there is no age requirement and the close relative is required to have lived in the house for ten years prior to the date of inheritance. Again, the close relative must not be beneficially entitled in possession to another house. Therefore, where a brother or sister falls foul of the brother / sister relief requirements, due to their age for example, they may be eligible for the close relative relief provided the requisite criteria are satisfied.

(12) Minor Child of a Deceased Child: If the testator is in locus paraentis to a grandchild by virtue of the fact that it's parent has died, and such parent having been the testator's child, then class A above will apply to that grandchild. Such a grandchild will only be able to avail of the relief if he takes the inheritance prior to attaining the age of eighteen years.

(13) Parents: Section 165 of the Finance Act 1995 provides that it may be possible for a person who is a parent of the disponer to be completely exempted from CAT in respect of inheritances taken on or after 12 April 1995. The exemption will apply if the date of the inheritance is the date of the death of the child and if the deceased child had received a nonexempt gift or inheritance from either or both of his parents within the period of five years immediately prior to his death. As such, it may be appropriate for parents who have a child with a sizable net worth to make a gift in excess of 1000 to that child once every 5 years so as to be in a position to obtain the exemption should that child die prematurely.

Section 116 of the Finance Act, 1991 provides that where a parent takes an inheritance from a deceased child they will be in a position to qualify for the class A threshold (£300,000) if the inheritance was taken on the date of death of the child.

(14) Relief for Permanently Incapacitated Individuals: Section 59A of the CAT code provides an exemption from CAT for expenses relating to medical care of an incapacitated individual, including the cost of maintenance in connection with such medical care. A gift or inheritance to be applied for the purpose of providing medical care to an incapacitated person will be exempt from CAT.

This information is based on our understanding of current tax law and Revenue Commission practice which may be subject to change in the future.