After spending much of your working life building your quality of life, savings, and paying off your property, you want to be able to ensure these go to the intended recipients without lumbering them with a huge tax bill. Capital Acquisitions Tax is charged on all money or property that is inherited or gifted to someone, and it’s the responsibility of the recipient to ensure the tax is paid.
This can lead to a situation where people have to sell an inherited property to pay the tax. However, planning ahead can help to reduce the tax liability and ensure as much of your wealth as possible ends up with the person you want to have it. The only exemptions to CAT are when it is gifted or inheritedfrom your spouse or civil partner, or on any gift below €3,000 in any one year.
What do I have to pay inheritance or gift tax on?
Many of the items that fall under the Capital Acquisitions Tax are things that would be considered part of an inheritance, such as cash, jewellery, cars, property (including land), and stocks and shares. However, the gift tax also applies to the use of a property for free, or even far below market value, interest free loans, or a life interest or right of residence in a property.
What are the thresholds and tax rates?
The tax-free thresholds are different depending on your relationship with the recipient. Revenue breaks these down in to 3 groups, A, B, and C.
Group A
Group A provides the biggest allowance. It applies to an inheritance or gift given to a child or stepchild, or, if yours or your spouse or civil partner’s child is deceased, a grandchild or step-grandchild under the age of 18, or a parent if they are taking an absolute interest.
Group A Threshold since 9 October 2019: €335,000.
Example: A child inherits a property worth €500,000 from their parents. You deduct the allowance from the market value, which leaves a balance of €165,000 that is taxable at a rate of 33%, meaning that without any forward planning the tax liability would be €54,450.
Group B
Group B sees a considerable decrease in the tax-free allowance allowed. It applies to parents that take a limited interest (not the full inheritance), brothers and sisters, Nieces or Nephews including the children of a spouse of a brother or sister, a grandparent, a grandchild over the age of 18, or any other lineal ancestor or descendent of the donor.
Group B Threshold since 9 October 2019: €32,500.
Example: A brother inherits €50,000 from his sister. You deduct the tax-free amount from the inheritance, which leaves a balance of €17,500 that is taxable at a rate of 33%, meaning that without any forward planning the tax liability would be €5775.00.
Group C
Group C applies to anybody not already covered in Group A or Group B.
The Group C Threshold since the 9 October 2019: €16,250.
Example: A friend leaves you a watch valued at €20,000. You deduct the tax-free amount from the value, which leaves a balance of €3,750 that is taxable at a rate of 33%, meaning that without any forward planning the tax liability would be €1237.50.
Items that are exempt from Capital Acquisitions Tax
As mentioned above, some items are exempt from gift or inheritance taxes. These include:
- Retirement benefits (including pension) and redundancy payments, although redundancy payments can be looked at differently if the employee is a relative of the employer and the amount is deemed unreasonably high, or if the owner of a private company pays themselves an excessive benefit as an employee.
- Winnings from gambling (including the lottery, sweepstakes, etc.).
- Gifts or inheritances from a spouse or civil partner.
- Payments for damages or compensation.
- Benefits only used for medical expenses of a person who is permanently incapacitated. Benefits for charitable purposes or received from a charity.
Other exempt items include gifts of up to €3,000 in any calendar year from a single person. So, if several people gifted you €2,000, they would all be tax-free.
There can also be an exemption if you receive a gift or inheritance that is your main residence, and you hold no interest in other properties. There are other qualifying factors, such as you must have been resident for the previous three years and will continue to live there for at least six more years, with a few exemptions.
If you are bankrupt or near-bankruptcy so an inheritance or gift simply reduce your debt, these can also be exempt.
Businesses and Other Reliefs
There are other reliefs for business and agriculture. If you qualify for either of these reliefs then it reduces the value of an inherited property by 90% for tax purposes. There are other rules and reliefs that we won’t go into detail about, as they can be very confusing, but they are reliant on the numbers of hours worked in a business, the length of service, and your relationship to the owner.
We can help you plan for the future to ensure you minimise any Capital Acquisitions Tax liability, we can utilise business relief, agricultural relief, favourite nephew or niece relief, and our years of experience to ensure your loved ones receive the maximum amount possible of any gifts or inheritance.
A planning partner with your best interests at heart
Mason Wealth Management has always been built on the relationships we develop with our clients. Your success is the reason we’ve continued to be successful for so many years and will continue to be into the future. Our practice is small enough to offer a personal service, providing friendly real-world advice in a down-to-earth way. At a time when other companies are speeding up their digital transformation and working from home, building close and meaningful relationships with real people can be reassuring.
Phil, Les, and Martina have always strived to provide the best possible ongoing support, ensuring your financial planning is meeting your changing requirements. While regular reviews and tailored solutions have always been part of our practice, the need for them is greater than ever. They allow us to identify areas of growth and underperformance, allowing us to tweak your plan to ensure you stay on track to achieving your goals.