Inheritance Tax

I have heard that my family may be liable to inheritance tax in the event of my death. Is this true and is it possible to protect my family from this tax liability?

Inheritance tax is a tax on the property and all other assets that people may receive from you when you pass away. Everybody is entitled to inherit a certain amount without any tax being payable, but above this figure inheritance tax must be paid on the full market value of what they receive.

The amount of inheritance tax payable is largely dependent on the relationship between both parties and the nature of the assets being received. For example, a spouse can inherit all assets from their deceased spouse tax free. A son or daughter may inherit up to €332,084 tax free but will have to pay inheritance tax of 25% of any figure over this threshold.

There are certain other reliefs and exemptions relating to Dwelling House Relief, Agricultural Relief and Business Relief.

Further strict time periods under which inheritance tax becomes payable can of course create a strain on a person’s ability to pay this tax as in many cases the individual may have to sell part of the assets inherited in order to pay the tax. As can be seen in the current market, disposing of such assets is quite difficult. In some instances loans are taken out in order to cover the tax liability, pending the sale of some of the assets. Again, securing a loan in the current environment can be quite a difficult task.

A very simple example of inheritance tax liability in operation is:

A surviving parent passes away leaving the following assets to a single son or daughter, who has not lived in the family home for 10 years and intends selling it. The value of the assets is as follows:

Family Home worth             €350,000

Holiday Home worth            €200,000

Contents of the Homes        €25,000

Car                                  €5,000

Money on Deposit               €10,000

Total Value                        €590,000

The son or daughter can inherit the first €332,084 tax free. The balance € 257,916 (€540,000 - €332,084) is liable for inheritance tax at 25%. The total tax liability is then €64,479.

The son or daughter in this simple example will have to pay a tax liability of €64,479. As most of the assets received are in the form of property, the son or daughter would have to cover a substantial portion of the liability from their own cash savings or possibly seek to take out a loan to cover the liability.

If the person in receipt of the inheritance was a brother / sister / niece or nephew, the total tax liability would be ever greater, coming in at €139,198.

So, what can be done to alleviate the tax burden in these cases?

This problem can be planned for in advance. A life insurance policy (Section 72 Policy) can be set up under trust for your beneficiaries. Such a policy will provide for a lump sum on death to your beneficiaries which can then be used to pay the tax liability. Provided the proceeds of the life policy are used to pay the tax liability, the proceeds of this life policy are not taxable when received by the beneficiary.

The ability to leave an inheritance to a family member is a wonderful gesture and one that would no doubt never be forgotten by those in receipt of it. The issues that arise for the person in receipt of such an inheritance can be complicated by the possible tax liability that comes with such a gesture. However, with some sound financial planning and advice, the issue of inheritance tax can be greatly relieved.