What will your legacy be? Hopefully more than a tax bill…
One of the Founding Fathers of USA, Benjamin Franklin once said, “in this world nothing can be said to be certain, except death and taxes.” For many people who own property in Ireland and also stock market investments, both of which have appreciated significantly in value in recent years, these two certainties now often happen hand in hand.
We’re finding that more and more time within our client conversations are focused on this area. Clients are looking to pass on wealth as effectively as possible to their loved ones, and are becoming acutely aware of the significant impact that tax has when transferring wealth.
Passing on wealth in Ireland
Back in the Celtic Tiger days before 2009, a parent could leave up to €542,000 to each of their children (smaller thresholds apply for other relationships) before inheritance tax had to be paid. The tax that had to be paid was 20% of any excess over this amount. And then the crash happened… As a result, the parent / child threshold was slashed over a few years to a threshold of only €225,000, above which an increased tax rate of 33% had to be paid.
There wasn’t a huge amount of noise about this at the time, as let’s face it, a lot of people’s wealth had suffered greatly with the collapse in property values and lost value in investment funds.
But then we fast forward to today where we’ve seen huge growth in both these areas. Even though the threshold for children has risen somewhat to €335,000, the tax rate remains at a very penal 33%. With a lot of inherited wealth tied up in property, there are more and more instances of properties having to be sold just to pay a tax bill.
The situation is not so bad where there are a number of children inheriting from a deceased parent, as the threshold amount applies to each individual child. It’s important also to note that there is no inheritance tax payable by a bereaved spouse, and there are some exemptions around inheriting a farm or business or when a child is actually living in the house they are inheriting.
Plan for this now
First of all, make sure that whenever you do eventually die, that your wealth is transferred in line with your wishes – check that your will is up to date.
Once this is in place, it’s then time to look strategically at your finances in terms of your wealth requirements today, your likely financial needs over the rest of your life and then what you hope to pass on when you die. This is an ever-changing and dynamic situation that requires careful planning and needs to be regularly reviewed.
Consider all of the thresholds
The inheritance tax thresholds, don’t only apply to your children, there are other (lower) thresholds in place for other recipients of inherited wealth. When you’re writing your will and particularly if your assets are significant and it’s in accordance with your wishes, you might consider spreading your inheritance also among grandchildren, parents, siblings, nephews and nieces as each of these will qualify for a tax free threshold of €32,500. Even outside of this, other people will qualify for a further reduced threshold of €16,250. The threshold amounts are lower… but it all counts – if it’s in line with your wishes.
Gift money during your lifetime
Another way to reduce or avoid a tax bill on death is to pass on assets at an earlier stage. Every individual can gift €3,000 p.a. to another individual without triggering a tax bill for the recipient or impacting inheritance tax thresholds. This is known as the Small Gifts Exemption. So parents can gift each of their children €6,000 each year… and each of their grandchildren and sons/daughters in law etc. This can really add up over time, reducing significantly the amount to be inherited at death, and as a result reducing any tax bill.
However, we always come back to the need to plan this carefully. Before you start gifting away your wealth, you need to ensure that your own future needs will be met, not matter what life throws at you.
Get appropriate life cover in place
There are life assurance policies designed specifically to pay inheritance tax bills called Section 72 policies. These may well be the best route if your assets are significant, and your beneficiaries are likely to inherit amounts in excess of their thresholds. These are different to other life assurance policies, in that they are used solely to pay inheritance tax and don’t attract a tax charge themselves.
We’ll be delighted to help you leave a really positive legacy after you are gone, as opposed to a tax bill. For more information on how we can help you to transfer your wealth effectively, talk to your Invesco consultant.