Succession planning (sometimes known as inheritance planning) is hugely underused in Irish society. As a result, Revenue take in huge receipts on ill-prepared deaths in the form of inheritance tax. In 2018 alone, Revenue took in €466m in inheritance tax receipts. This has increased from €186m in 2010 (250% increase). In the same period, gift tax has remained relatively constant and minuscule in comparison (2018: €52m Vs 2010: €46m – although Revenue receipts did decrease in between). The difference between inheritance tax and gift tax is whether the assets are passed on death or not. This indicates to me that people plan their gifts while they are alive but not so much when they die.

CAT (which is inheritance and gift tax combined) is considered by many to be a very unfair tax. The reason for this is that an individual pays tax to accumulate assets during their lifetime either through income tax (up to 52%), CGT (33%) or CAT (33%). Then, the asset is taxed again on death when passing their estate to their loved ones. So why do you not hear more complaints about it? Mainly, because it is essentially a tax on the upper and middle class of society which no one is going to complain against. However, as house prices rise, more and more people are coming within the scope of CAT. This can be seen by the rising CAT receipts for Revenue.

It is likely that CAT will affect all of us in our lifetime either through the gifting or receiving of assets. Hopefully, this article can be a useful guide to assist you with your planning needs. In addition to CAT, CGT and stamp duty can also be an issue for succession planning.

What Should I Do Now?

• Calculate Your Net Worth

The most important and difficult step in succession planning is to calculate your net worth. It can be extremely difficult to figure out how much you are worth now and how much you will be worth in 5, 10 or 20 years’ time. This may be due to having different bank accounts, investments, mortgages, pensions, etc. However, it is a crucial step in succession planning. Besides, if you drop dead in the morning, it will be done for you by a solicitor. Imagine how difficult and expensive it will be then?

Succession planning is more than claiming a few tax reliefs, it’s about us getting to know our clients, and their personal ambitions for the future. The conversation is not driven by tax, it is driven by your desires and tax reliefs should help these desires to come to fruition.

Potential Tax Liabilities

For clients who own businesses, farms, property, etc. you should be aware that there can be three main taxes involved in succession planning, namely:

• CGT – only if selling an asset or passing as a gift i.e. there is none on death
• CAT – on the recipient of a gift/inheritance
• Stamp Duty – payable by the recipient – only if selling an asset or passing as a gift i.e. there is none on death

Capital Gains Tax (“CGT”)

CGT is payable by the person gifting the asset to the next generation or selling an asset. Irrespective of whether you gift an asset, market value is imposed on the transaction. CGT is calculated on the market value less the cost price. Therefore, if you bought shares for €100k and sold them for €300k, the capital gain is €200k. This amount is subject to CGT at 33%. If you gifted these shares to your child, you would still pay CGT as market value is imposed.

What are the most common assets we see CGT on? The main assets would be companies (shares), stock market shares, property.

TAX RELIEFS

Are there any CGT reliefs available?

The good news for you is that there are reliefs available for passing/selling companies. Other assets such as stocks and property are difficult to avoid CGT. However, there can be innovative ways to avoid CGT on these also. The most common CGT reliefs used in succession planning are:

1)Retirement Relief

This is available to family companies. This is a great relief for individuals running family companies and approaching retirement age. It is available to individuals over 55 years and exempts the sale/gift from CGT. There is an upper limit for individuals selling their company to a third party, which is €750k. There is no upper limit value for gifting a company to a child provided it is done so before you turn 66. After 66, the limit is €3m per claimant.

2)Entrepreneur Relief

This is a relatively straightforward relief to qualify for and can be worth €230k per person. It allows an individual to pay 10% CGT (as opposed to 33%) on the first €1m proceeds on the sale of a company. The minimum shareholding requirement is 5% and there is a minimum holding period of 3 years to qualify for the relief. This means that several people in one company can qualify. However, you must be a fulltime working director of the company. This can be one of the pitfalls of this relief if someone works for two companies, you cannot be fulltime in both. This is the one relief entrepreneurs watch closely for in the annual budget as it is expected to increase in the coming years. However, possibly not this year with the Minister promising a “no deal” budget. The corresponding UK version is £10m.

3)Principal Private Residence

There is an exemption from CGT on selling or gifting your private residence. Therefore, if you are approaching retirement and have a large gain on your house, you could either gift to a child or sell to a third party without paying CGT.

Capital Acquisition Tax (“CAT”)

As discussed above CAT, is a tax on the recipient of a gift/inheritance – how can you limit your exposure to CAT?

THRESHOLDS

How much can you inherit tax free?

If you are passing your estate to a child, each child can inherit €320,000 before paying any tax on the assets. A relative who is not a child of yours can inherit €32,500 before paying tax, while a 'stranger' can inherit €16,250 before paying tax. Each type of relationship is a category of relationship and can only be used once in your lifetime. Therefore, you cannot inherit €320,000 tax free from both parents and similarly you cannot inherit €32,500 from an aunt and uncle, just one relative in each category. Anything above and beyond the thresholds is subject to 33%.

Take for example, if you own a 4-bed house in Cork, which is worth roughly €400,000. In most cases, you cannot give it to a child tax free. They will have to pay at least €26,400 in CAT. This would be in addition to 33% CAT on any further gift from a parent in their lifetime.

Business Assets Relief

This can work in symphony with retirement relief and entrepreneur relief. It reduces the value of a business for CAT purposes by 90%. That means that a child can inherit a business worth €3m and still be within the CAT threshold of €320,000. The recipient would have to hold the business for 6 years.

Agricultural Relief

The government have recognised the need to not impose CAT on farmers as it may result in farms being split and sold unnecessarily. No one wants to see the great farms of this country being split and divided by each generation to avoid CAT. This relief is similar to business assets relief in that it reduces the market value of the farm by 90% for CAT purposes.

However, if this is not done correctly, it can result in a huge tax liability and becomes a lot more difficult to plan through a Will.  

Small Gift Exemption

This is a hugely under used exemption. A person can receive a €3,000 gift per annum from anyone tax free and it will not affect their lifetime thresholds. The beauty of this exemption is that it is only available while you are alive, and I am told you will get a lot more happiness seeing someone enjoy €3,000 rather than Revenue taking 33% of it when you die.

However, the downside to this relief is that people are afraid to give cash away. This is a normal rational human instinct as it is impossible to know how much money one will need to live on for the rest of their life. No one knows if they will die at 70, 80 or 90.

Calculating how much you think you will need to live on in retirement is an important step in succession planning. One can spend their whole life in the accumulation stage (i.e. working and saving) and never actually calculate how much they need in retirement. If you have too much, it will probably get taxed on death, so helping our clients understand how much they will need to enjoy the remaining years on this planet is a key priority for us in succession planning.

Have more kids

This might seem crazy but you can give every child €320,000 tax free. Therefore, larger families can pass more assets free of CAT. Seems strange but if you die with a house worth €400,000, a pension of €200,000 and €40,000 cash, there will be a large tax bill of €105,600 if you have one child. However, there will not be any tax bill if you have two children.

Planning for Death - Wills

A question that often arises is – at what stage in life is it crucial to have a Will? The answer I would give is from the date you first have an asset. If you were to pass away without a Will, statutory law decides what happens to your estate.

Take for example a couple living together who are not married and have no children. Should one person die, the estate would go to their parents and not their partner.

In most cases, we would advise clients to set up some form of Trust structure especially if they have young children. This may allow added flexibility to plan after you die.

However, the above planning is in stark contrast to what was found by a recent study of 1,000 Irish adults by mutual life, pensions and investment company Royal London. They found that 72% of those surveyed either did not have a Will or have been meaning to “sort it out”. This all adds to a lack of succession planning in Ireland.

Finally, what we recommend you do Now!

• Calculate your net worth by listing your assets.
• Calculate how much you will need to live on in retirement.
• Make a Will.
• Talk to your Quintas accountant/tax advisor, we are always here to help.

Regards

Kevin Canning