This question arose in a recent meeting that we had with clients. We were having our annual review with a husband and wife, and the conversation came round to estate planning. This couple have retired and have started thinking about the legacy they’re going to leave behind… or indeed the tax bill!
As we explained how inheritance is dealt with in Ireland from a tax perspective, their initial question was, “Whose problem is this?” It was a very valid question. Because the problem belongs to their children who will inherit their assets. But that’s not really the full picture, as different people like to approach this issue in different ways. And who are we to say who is right?
Some people approach this from the perspective of having accumulated the wealth themselves, it’s theirs to spend as they wish. Whatever is left over after they’ve shuffled off this earth will be inherited by their children. If some tax must be paid on this, well they’ll just have to pay this out of cash inherited or by selling some of the assets if necessary.
Others want to leave everything as neat and tidy as possible for the next generation. They want to live their life to the full too, but they want their inheritance to be structured so that even the tax bill is planned for. The benefit of this approach is that they can then ensure that maybe a particular asset such as a holiday home won’t need to be sold to pay a tax bill, but instead can stay in the family as a
legacy and memory of the parents.
Neither right nor wrong, just different. But we believe everyone should make a conscious choice…
The challenge in Ireland today is that the amounts you can inherit tax free, known as the Capital Acquisition Tax thresholds, are so low and the tax rate so high at 33% on inheritances above these thresholds. Depending on the number of children, even if a parent’s only asset that is bequeathed is a 3-bed semi in Dublin or other city, the inheriting child(ren) may well have a tax bill.
The good news is that if the parents and/or the children are interested in addressing the issue while the parents are alive, there are strategies that can be deployed to mitigate the tax bill. These can include using specific life assurance solutions, or indeed the parents can gift money to the children tax free using the Small Gifts Exemption while they are alive.
By the way, our couple decided they wanted to plan the payment of their kids’ inheritance tax bills and are in a position to do so. They have a specific asset that they want to remain in the family that otherwise would likely need to be sold to pay the tax bills. They reckon their kids and grandkids will remember them fondly for this!
If you’re wondering what slice the inheritance tax bill might take from your legacy, feel free to give us a call.
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Article first produced on PPS Monthly April 2023 Newsletter.