Sunday Times Article on Estate Planning, 9 October 2022
Authors: Kieran O’Daly & Jonathan Sheahan, Managing Director of Compass Private Wealth
Published: Sunday Times Business Section, 9 October 2022
Most people want to leave something to their children or even to extended family and friends when they die, but don’t want their good intentions to come with a hefty tax bill attached. To avoid this there are a number of simple steps you can take to ensure that your legacy is passed on as smoothly as possible and with minimum tax liability.
Thresholds
Inheritance Tax of 33% is payable when the value of the assets inherited is higher than a certain threshold amount. For inheritances received from parents this currently stands at €335,000. The threshold is €32,500 where the beneficiary is a grandchild, sibling, or niece/nephew. For extended family and couples who live together but are not married to one another, or civil partners, the threshold is just €16,250.
“What this means for parents looking to leave a €500,000 legacy to one of their children is that a child would be liable for €54,450 inheritance tax even if the full threshold of €335,000 was available to them,” Barry McCutcheon, proposition lead with Royal London Ireland, says.
Minimising Tax Liability
As a way of limiting the amount of tax payable from their estate, many people opt to bestow gifts on their offspring, extended family, and friends during their lifetime rather than leaving everything to be distributed according to the terms of their will after they are gone. This method is obviously more tax efficient but does come with potential pitfalls.
“While its never a bad thing to think of others, when it comes to inheritance planning you have to think of yourself first,” Jonathan Sheahan of Compass private Wealth says. “It’s a case of putting on your own life jacket before helping others with theirs. If you are planning on distributing some of your estate before you die the first thing you need to do is carry out a full cash-flow analysis to make sure that you have enough liquid cash to fully enjoy your remaining years.”
This analysis should take account of inflation and the cost of medical care among other considerations. "Once you work out how much you are going to need, you should ring-fence that amount for yourself. Any gifts you give to family, friends, or anyone else after that should only come from surplus cash flow," Sheahan says.
The current gift allowance threshold is €3,000 per annum to anyone, relate or not. With the inheritance threshold for extended family and friends relatively low, this is a popular method of distributing wealth without incurring any capital acquisitions tax liability. “This is a very tax-efficient way of distributing wealth,” Sheahan says. “A couple with three children, all of whom are married and have six children between them, could technically gift up to €72,000 tax-free per annum.”
Another popular method of offsetting inheritance tax liability is through a Whole-of-Life Section 72 life insurance policy, subject to a medical, this is a special non-reviewable monthly payment policy approved by the Revenue Commissioners that can be taken out by the benefactor to help pay any inheritance tax their beneficiaries might become liable for as a result of their legacy.
Similarly, Section 73 relief involves a monthly savings policy set up to offset future gift tax liability. After a period of eight years of regular contributions, the policy can be gifted to a third party tax-free provided they are liable for gift tax within the same 12-month period.
Make A Will
Sheahan also recommends making a will with your wishes clearly set out to avoid any confusion for friends and family after you have gone. “It is important to do some housekeeping on your financial affairs as well to make things as simple as possible. For instance, it makes sense to centralise your finances by having fewer bank accounts if possible as this will make it easier to execute the terms of your will,” he says.
“Having an enduring power of attorney in place also helps to ensure that the transition will be as smooth as possible. Its also important that your executors have full knowledge of your affairs. It’s a difficult subject as people can be quite secretive when it comes to talking about money or death, but it can help to avoid conflict between beneficiaries later on.”
Jonathan Sheahan is Managing Director of Compass Private Wealth with offices in Dublin and Cork.
Disclaimer: The above is generic in nature and does not constitute financial advice.