30 January 2015
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Succession Planning
by Dave O'Brien, Tax Director

When disposing of an asset or drafting a will you need to ask your Solicitor what the tax implications are of doing the transactions. While they may not know the answer they will be able to put you in touch with a tax advisor who will.  A simple conversation with a tax advisor could at the very least make people aware of the taxes involved but more importantly can save the person a considerable amount of money.

Passing of assets to the next generation is something we all will have to consider at some point in our lives. These can be assets such as the family home, cash or a business. Careful planning can reduce the liability significantly in all of the above cases.

When you start thinking of transferring assets to your children the first thing to know is that each child is entitled to receive gifts/inheritance of €225,000 tax free from their parents. Any gift/inheritance received over this amount will be taxed at 33%. This tax free threshold is a lifetime limit and in many cases knowing this is all the planning that is required.

However consider a parent with 2 children and a house worth €500,000. If they will the house to their children in equal amounts the children will have to pay €8,250 each in tax and that is only if they have received no prior gifts. While this is not a problem if the children want to sell the house as they will have the cash to pay the liability, if they don’t want to sell it how are they going to come up with the €8,250? Planning ahead could save the children the pressure of having to raise the cash. For instance transferring the house to your children when property values are low could bring them under the tax free threshold and no tax would have to be paid.

Now lets take the above parent and add on that the parent has €200,000 in cash. If the 2 children receive this on the parents death, along with the house, they would be paying an additional €33,000 each in tax. This can be alleviated by the parent giving €3,000 per year in cash to each child. An annual gift of €3,000 can be given from one person to another without any gift tax implications. If the second parent was alive they can give an additional €3,000 to their children per annum. That’s €6,000 the parents can give each child. If the child is married they can each give €3,000 to the childs husband or wife. That’s €12,000 now they can give to each child without tax implications. And that’s before they start giving money to the grandkids! Remember you can do this on an annual basis so it doesn’t take long for the “small gifts” to add up.

Business Assets

Transferring business and farm assets to the next generation can be also be done tax efficiently, but if you don’t plan for it the likelihood is that your child will have to pay tax on inheriting the business or farm. Take a farm as an example. If you own a farm and will it to your only daughter, who is a nurse who does not own any assets, she will have to pay inheritance tax on the value of the farm. She will not be entitled to any reliefs. However if you gift her the farm and she immediately leases the farm on a long lease to a qualified farmer her tax liability will be reduced by 90%.        

Finally let’s consider the capital gains tax liability of the owner of a business worth €5m that’s being passed to the next generation. The owner who is 65 is debating gifting the business to his only son. If he gifts before he reaches the age of 66 the tax liability for the father on disposal will be nil. If he gifts the business when he is aged 66 or over the tax liability for the father is €660,000. Of course he could wait until he dies to pass over the business to his son in which case there would be no capital gains tax liability, however any inheritance tax payable by the son would be determined by the tax rules in place at the time of death i.e. you can’t plan for it.

Unfortunately qualifying for all these reliefs is not at all straight forward and proper professional advice should be sought before you consider doing anything. 

If you have any queries in relation to your tax planning contact us on 021 4641400 or email info@quintas.ie.

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