1. What is Capital Acquisitions Tax (CAT)?
CAT is a tax you pay when you receive a gift or an inheritance. CAT comprises two separate taxes – a Gift Tax payable on lifetime gifts and an Inheritance Tax payable on inheritances received on death. It is the person receiving the gift or inheritance who is liable to CAT and not the person or estate providing the benefit.
2. How is it charged?
With effect from 1st December 1999, a charge to CAT will arise where either the disponer (the person giving the asset) or the beneficiary (the person receiving the asset) is resident or ordinarily resident in the State at the date of the Gift or Inheritance. Where both the disponer and the beneficiary are not resident or ordinarily resident in Ireland, a charge to tax would only arise in relation to Irish property.
Basically, anything of value that you leave to other people following your death (other than your spouse), will attract a tax due once it is outside of the threshold limits.
3. What is the tax rate?
33% is the current (in 2022 and also for 2023 from Budget 2023 on 27th September 2022) rate of tax on gifts or inheritances received by a beneficiary. It has been this rate since 2012. Source CAT Consolidation Act 2003 (as updated by subsequent Finance Acts).
4. Can you get any amount tax free?
The amount a beneficiary can receive tax free depends on their relationship to the ‘disponer’. The following are some details of the 3 main groups.
Threshold – €335,000 (Unchanged from Budget 2023)
Where the person receiving the property is
- a child of the disponer or,
- a child of the civil partner of the disponer, or,
- a minor child of a deceased child of the disponer or,
- a minor child of a deceased child of the civil partner of the disponer, or,
- a minor child of the civil partner of a deceased child of the disponer, or,
- a minor child of the civil partner of a deceased child of the civil partner of the disponer.
Threshold – €32,500
Where the person receiving the property is
- a lineal ancestor of the disponer,
- a descendant of the disponer,
- a brother/sister of the disponer, or,
- a child of a brother/sister of the disponer, or,
- a child of a civil partner of a brother or sister of the disponer.
Threshold – €16,250
All other cases
The threshold amounts are those applying with effect from midnight on 12th October 2016.
Source CAT Consolidation Act 2003 (as updated by subsequent Finance Acts).
5. Is tax payable on everything you receive as a gift or inheritance?
While tax is payable on all assets you receive, certain reliefs and exemptions apply to certain types of assets. The main reliefs are:
– Agricultural Relief – the value of farmland, buildings and stock can be reduced by 90% where the beneficiary is a qualifying farmer and holds the property for a minimum of 6 years.
– Business Relief – can provide a similar reduction of 90% in the value of certain businesses or private companies, where both the business and the beneficiary meet certain conditions.
– Family Home Exemption – exemption from Gift and Inheritance Tax is available on the value of certain “dwellings” with up to an acre of land where the disponer and the beneficiary meet certain conditions.
– Life Assurance Relief – the proceeds of life assurance plans, where the plan was effected specifically for the payment of Inheritance Tax or the tax payable on the value of an Approved Retirement Fund (ARF) inherited by a child over the age of 21, will not be subject to Inheritance Tax – provided the money is actually used to pay the relevant tax bills. This ‘Life Assurance Relief’ is commonly referred to as ‘Section 72 Relief’.
6. How can I reduce the CAT liability?
There are a number of both complex and simple ways for someone to reduce the amount of CAT that would be payable on the distribution of their estate following their death. Both are best explored by speaking with your accountant or solicitor that specialises in estate planning. There are other ways than having more children! For instance, the small gift exemption allows you to gift €3,000 very year to various relatives or individuals throughout your lifetime that will not form part of their lifetime threshold, hence reducing the value of your estate on death. This is of course, subject to you having sufficient cash to maintain your own lifestyle requirements in addition to these gifts. As is very common these days, people in the later stages of life are asset rich, but cash poor.
Anything that is left after whatever preparations you have made, will be subject to CAT payable by your beneficiaries. A final approach to take in preparation for this inevitability, is to take out a Section 72 policy to cover the amount due. This really does save on an awful lot of hassle following your death.
7. I have a life assurance policy already. Can I use this?
Yes you can, but the amount payable from this policy on your death will form part of your estate when it comes to calculating the CAT bill.
For instance – If the combined value of all of your assets – house, car, cash etc. – amounts to €1m and you also have a payout of €250k from a life assurance policy, then the value of your estate for CAT purposes is €1,250,000.
A Section 72 insurance policy is set up in such a way that it does NOT form part of your estate’s valuation for CAT purposes. In the scenario above, if your life assurance policy was set up as a Section 72 policy, then the valuation of your estate would remain at €1m and a separate fund of €250k cash to pay the CAT.
Your existing life assurance policy may also be a Term Assurance policy, which covers you only for a definitive amount of time – E.g. Cover may cease at age 80. With average life expectancy in Ireland being c. 82.5 years, your policy may not have the opportunity to pay out a benefit. A Section 72 policy is a Whole of Life policy – It will pay out the benefit irrespective of what age you die at.
8. Can a child take out a life assurance policy on their parent's life?
Yes they can, however there are some conditions and things that MUST be put in place before this can be done.
This is also quite a common approach to take, when the parents are unable to meet with the commitment of the monthly premiums. In fairness, as it is the child who will benefit from the policy, it is an approach worth considering.
When a child pays the premiums, they will be the owner of the policy and as such, the child will receive the proceeds of the policy tax-free and are then in a position to pay the inheritance tax.
I should mention here that when I say ‘child’, I am referring to an adult child.
As a child cannot normally insure the life of a parent, they will have to prove to the insurer that there is need for a Section 72 policy. Although in this instance, the policy would be referred to as a standard Whole of Life policy. This is easily done, by showing a copy of the will or proof of assets. A financial interest will have to be established. The insurance company needs to grant permission for this.
An alternative approach involves the child gifting the maximum €3k per annum to the parents and the parents can then use that cash, from their own bank account, to pay the monthly premiums directly to the life assurance company. Clarity of intent and purpose is vital to satisfy the Revenue’s requirements for any form of Section 72 benefit.
9. Do all life assurance companies in Ireland offer Section 72 or Whole of Life policies?
No. They don’t. The only life assurance companies in Ireland to offer true Section 72 policies that can be legitimately & efficiently used for the payment of inheritance taxes are Irish Life, Royal London & Zurich. As we hold agency agreements with each of these companies, our job is to find you the most suitable policy, at the best price, to suit your needs.
10. Is the family home subject to inheritance tax?
Yes. Everything you own and pass on to someone else, is subject to taxation. The tax is applied to the beneficiary of the asset, so the amount payable will depend on the relationship of the beneficiary to the person leaving the asset (the disponer), and the tax free category that they fall into.
There can be an exemption for a child who has lived in the family home for three years leading up to the date of the inheritance. The property can be gifted to them tax free, but there are conditions attached.
The child (the beneficiary) must not own any other property and the beneficiary must stay in the property for six years after they take ownership, and they are not allowed to own any other property during that term.
11. Can you insure against inheritance tax?
Yes – that is the exact purpose behind effecting a Section 72 insurance policy. Its’ sole purpose is to provide a lump sum, on death of the insured person, which must be used to pay any inheritance taxes due by the beneficiaries.
The tax is inevitable to some degree, but how it is paid for can be managed and prepared for in advance.
12. Will my premiums increase or change at all?
No. Whatever your premium is when your policy starts, is the premium that you will pay for the duration of your policy. It will never change.
If you include the Indexation option with your policy, your benefit amount will increase every year and this increase in cover will also result in an increase in premium.