Capital Acquisitions Tax (CAT) is the Irish tax on gifts and inheritances that arises where a benefit is taken by or from a person living in Ireland which exceeds the threshold for CAT purposes applicable to that beneficiary. It also applies if a gift or inheritance includes Irish property.
The calculation of the tax is based on:-
- The value of the benefit
- The relationship between Donor and Donee
- Any prior benefits received by the Donee
The tax is charged on the “taxable” value of the gift or inheritance. The “taxable” value is the market value of the benefit after deduction of certain costs and expenses and any consideration paid by the beneficiary.
Tax Free Threshold
CAT legislation makes provision for a tax free threshold below which no tax is paid. The tax free threshold depends on the relationship between the person giving the benefit and the person receiving it. There are three tax free thresholds for CAT purposes which are as follows:-
Class A: €280,000.00 where the recipient is a child/foster child/minor child of a deceased child or where a parent inherits from a child. In some cases, this threshold can also apply to a parent or to a nephew or niece who has worked in the family business for a period of time.
Class B: €30,150.00 where the recipient is a brother, sister, nephew, niece or linear ancestor/descendant of the benefactor.
Class C: €15,075.00 in all other cases
Capital Acquisitions Tax Rates
For benefits taken on/after 6 December, 2012:
Below Threshold: Nil
The Tax Free threshold is cumulative so all previous gifts or inheritances received since 05 December 1991 and falling into the same group threshold reduce the tax threshold available.
Pay and File
You must pay and file your CAT liability by 31 October. Where the valuation date arises between 01 January and 31 August, the pay and file deadline would be the 31 October in the same year. Where the valuation date arises between the 01 September and 31 December, the pay and file deadline would be 31 October in the following year.
Steps to Reduce your Family’s Exposure to Inheritance Tax
As the property market is showing signs of recovery, particularly in Dublin, more people may be finding themselves liable for gift or inheritance tax. The tax free threshold has decreased in recent years while the tax rate has risen. For example, in 2009 the tax free threshold for an inheritance by child from parent was €542,544 but now stands at €280,000.00. In addition, the rate of inheritance tax has risen from 20% in 2008 to 33% today.
The following steps should be considered by Donors who wish to minimise the exposure of their beneficiaries to Inheritance Tax:-
Make a Will
Anyone who owns a property or other assets such as a deposit account, An Post or Credit Union investments, savings plan or life assurance policy should make a Will. A Will not only ensures that you can distribute your assets as you wish but it also means that you can hopefully reduce the tax liability on your estate and spare your family and beneficiaries the expense and distress of a lengthy and in some cases acrimonious administration of your estate.
Marriage, Civil Partnership and Co-Habitation
There is no CAT on gifts/inheritances between spouses or couples registered as a civil partnership.
However, if two people are living together and the cohabitants are not in a civil relationship the same relief from CAT does not apply. So, if you are living with someone and not married or in a civil partnership, you will only be able to inherit up to €15,075 from your partner tax free. You will be liable for inheritance tax at the rate of 33% on any balance over that threshold.
It is important that cohabitants understand the tax implications of not entering into a marriage or civil partnership.
Set up a Trust
It may be advisable to consider setting up a trust if you have young children or grandchildren. This will help you to pass on your estate to them more efficiently and at a time when they are mature enough to handle their inheritance.
If feasible, it is useful to have some cash assets such as deposit accounts or investment funds in your estate in order to ensure that there will be sufficient funds available to your beneficiaries to meet any inheritance tax payable without the necessity of selling property or private companies which may prove difficult.
Small Gift Exemption
Where a benefit is a gift (i.e. not passing on death) a small gift exemption may be available. The small gift exemption is €3,000.00 per donor per year. If the gift is higher in value, the €3,000.00 exemption can simply be deducted from the value of the gift. Therefore, it is open to parents with funds at their disposal to set up a savings fund for each child and for each parent to give each child (and each grandchild) a sum of €3,000.00 each year free of gift tax.
Dwelling house Relief (DHR)
If dwellinghouse relief is available no CAT arises on a gift or inheritance of a dwellinghouse. A dwellinghouse is a building or part of a building which is used or suitable for use as a dwelling. This includes grounds of up to one acre which are occupied and used with the dwelling. For DHR to apply, a beneficiary must have occupied the dwelling as his/her only or main residence throughout the 3 years prior to the gift or inheritance.
The beneficiary must retain the dwelling house and occupy it as a main residence for 6 years after the gift or inheritance (unless he is over the age of 55 at the date of the gift or inheritance) or 6 out of the 7 years if the dwelling is replaced by another dwelling within the 6 year period. The beneficiary must not be beneficially entitled to any other dwelling house at the date of gift or inheritance.
Additional conditions must be met where a gift is made (as opposed to an inheritance).
Depending on the circumstances it might be appropriate for a child to move into a property which a parent intends to leave to that child.
Agricultural Property (land, pasture, woodland, crops, trees, farmhouses, buildings, livestock, bloodstock and machinery or a payment entitlement) which form part of a gift or inheritance enjoy additional CAT relief.
Agricultural relief applies to gifts and inheritances of agricultural property and, if available, can reduce the taxable value of a gift or inheritance by 90%.
To avail of this relief, the beneficiary must be a “farmer” as defined by the Capital Acquisitions Consolidation Act, 2003 which is not the normal definition of a farmer. A farmer for CAT purposes is not necessarily an individual who has worked as a farmer. It is a financial test. For CAT purposes, a “farmer” is an individual who can show that on the valuation date for the gift or inheritance, not less than 80% of the market value of his/her entire assets (after receipt of the gift or inheritance) comprise agricultural property. It may be possible to become a “farmer” by disposing of some non-agricultural assets.
The beneficiary must farm or lease the agricultural property for a period of not less than 6 years commencing on the valuation date.
The beneficiary (or lessee, where relevant) must have an agricultural qualification or farm the agricultural property for not less than 50% of his/her normal working time.
Any relief given may be wholly or partly clawed back within 6 years of the gift or inheritance if the agricultural land is sold or compulsorily acquired and not replaced within one year of the disposal by other agricultural property.
If land which qualified for agricultural relief has development value and is disposed of in whole or in part between the 6th and 10th anniversary of the benefit, the relief granted on the development value will be clawed back.
The 80% test does not apply in the case of agricultural property consisting of trees and underwood.
Business relief is aimed at a working business and the transfer of that business to beneficiaries who will continue to run that business. This relief works by enabling the beneficiary to reduce the value of a relevant gift/inheritance by 90% of its taxable value.
Certain types of business are excluded:-
- Businesses dealing in currencies, securities, stocks or shares, land or buildings, or
- Making or holding investments
The relief applies to the business of a sole trader or a partnership and where the business is run by a limited company the shares of that company.
Only relevant business property will qualify for the relief. Relevant business property is defined as:-
“the business or an interest in the business in the case of business carried on by a sole trader or by a partnership. “Business” is defined as one which is carried on for gain and it includes the exercise of a profession or location as well as a trade”.
Individual assets of a business, if transferred without the business, will not qualify.
To qualify for business relief, the assets must have been owned by the Disponer for a period of 2 years before an inheritance or 5 years before a gift.
The relief will be withdrawn if the relevant business property is disposed of within 6 years of the date of gift/inheritance and is not replaced within a period of one year from the date of disposal.
If land which qualified for business relief has development value and is disposed of in whole or in part between the 6th and 10th anniversary of the benefit, the relief granted on the development will be clawed back.
Using Life Assurance to Fund Gift and Inheritance Tax
Section 72 & Section 73 Policies
Relief was introduced by Section 60 of the 1985 Finance Act (now contained in Section 72 of Capital Acquisitions Tax Consolidation Act 2003) to allow people to plan for the payment of inheritance tax in an efficient way. If a life assurance plan is put in place to provide for the tax, the Revenue will not charge inheritance tax on the policy proceeds if the money is used to pay inheritance tax (Section 72) or gift tax (section 73). The relief is granted subject to certain Revenue conditions. It is essential that the Will contains instructions to the executors as to how the proceeds of the policy are to be applied.
The information given above is a guideline only and does not take into account your personal circumstances However, the tax issues can be complex and we would suggest that professional tax and legal advice be sought.
For further information or to prepare a Will, please contact our Private Client Department.
By Orla Moran, 11 April, 2016