Succession Planning Tips - How to Minimise Future Generations Inheritance Tax Liability

By Mairead Harbron, Partner, PwC Private & Patrick O’Driscoll, Senior Manager, PwC Private

 

There are a number of tax reliefs that should be considered when transferring assets to future generations. Inheritance tax is often one of the largest tax payments due to Revenue by individuals. 

There were no changes to the inheritance tax free thresholds in recent years. However, the current capital acquisition tax (“CAT”) rate of 33% which applies to gifts and inheritances could increase in the future.  In this article we consider potential planning and relief options which may mimimise the CAT payable. 

A structured succession plan helps to mitigate a number of risks and ensures future stability particularly if there is a family business or farm. A succession plan can determine the potential tax liabilities that will arise on transferring assets to future generations now or in the future and may ultimately reduce the CAT payable. 

 

Succession Planning Considerations 

It is important to take the necessary steps and that the right procedures are in place for passing assets to the next generation. We have outlined some points to consider when implementing a succession plan.

Tax Free Thresholds 

Gifts and inheritances can be received tax free from CAT up to a certain amount. The tax free amounts varies depending on the relationship to the person making the gift/inheritance. 

There are three different tax free group thresholds which are summarised broadly below:

Group Name	Relationship to disponer	Tax free threshold
Group A	Son, daughter, adopted child and step child	€335,000
Group B	Brother, sister, niece, nephew or grandchild	€32,500
Group C	Strangers in blood and all other relationships not mentioned in Group A  or B	€16,250

 

In certain circumstances, a parent receiving an inheritance from a child can qualify for the Group A threshold of €335,000. The group thresholds should be considered when passing assets to the next generation. Individuals should consider the Group B tax free threshold for gifts/inheritances particularly if their children have fully utilised their Group A thresholds. 

 

Capital Gains Tax / Capital Acquisition Tax Offset 

When an asset is gifted, a liability to CAT and Capital Gains Tax (“CGT”) can arise in respect of the same disposal. Where this occurs, the CGT payable is allowed as a credit against the CAT liability. 

This rule is important where it is intended to gift a mix of assets over a period of time. It may be beneficial to gift assets which are not subject to CGT first and utilise the beneficiaries relevant tax free CAT threshold, before gifting assets subject to CGT, where the CGT may be offset against the CAT payable. 

 

Small gift exemption 

The small gift exemption allows an individual to gift any other individual up to €3,000 tax free each year without eroding their tax free thresholds. 

There is no limit to the number of individuals who can receive the small gift exemption annually. It is commonly used by parents and grandparents to pass wealth to their family over time. However, the small gift exemption is not limited to family members and  can be used to make gifts to friends/strangers in blood. 

It is important to note that small gift exemption cannot be claimed retrospectively. Therefore, we suggest that individuals gift annually where possible. Often parents/grandparents may begin gifting €3,000 each year upon the birth of their child/grandchild Therefore, a child/grandchild could receive tax free gifts of €54,000 by the time they turn 18 years of age. 

If both parents/grandparents gift €3,000 each year for 18 years, this results in a total tax free gift of €108,000. 

If individuals want to gift money to individuals under the age of 18, they should consider doing this through a bare trust. These trusts allow individuals to gift the annual sum of €3,000 but the children/grandchildren will be unable to access these funds until they are 18 years of age or older. This exemption is often overlooked by individuals, however it is beneficial particularly if implemented for a number of years. 

 

Family Partnerships

Family partnerships allow assets to grow in value in the children’s name, while the parents retain control of the assets. CAT is chargeable on the value of the assets transferred into the partnership, therefore any increase in value will be tax free. 

Family partnerships also provide an opportunity for parents to teach their children about investments and taxation. 

 

Section 60 Policy

A Section 60 policy is an insurance policy which should cover the inheritance tax payable on your death. The main benefit of this policy is that proceeds of the policy is not taxable. These policies tend to be quite expensive and therefore may not be suitable unless your family will receive inheritances about their tax free threshold. 

Key actions to consider:​

1. Consider the relevant tax free thresholds 

Individuals should consider the relevant tax free thresholds for their beneficiaries. Particularly where children have fully utilised their Group A tax free thresholds. Individuals may consider making gifts to their grandchildren within the Group B threshold to reduce the ultimate CAT payable. Particularly, if their children are comfortable financially or may make substantial gifts/inheritances to their children in the future. 

2. Consider the small gift exemption 

The annual small gift exemption is particularly beneficial in passing wealth to future generations without eroding the beneficiaries tax free thresholds. The utilisation of the small gift exemption annually also reduces the assets passing through your estate which may be subject to CAT at 33% over the beneficiaries tax free thresholds. 

​3. Consider CGT/CAT offset if passing assets throughout your lifetime 

Individuals should consider the CGT/CAT offset if passing assets throughout their lifetime. The CAT/CGT offset is only available on the same event. Therefore, individuals should consider the timing of mixed asset transfers.

4. Consider a family partnership 

A family partnership is advantageous as the beneficiaries will be subject to CAT at the value of the assets at the date of transfer to the partnership. Therefore, there is no tax chargeable on the growth of the assets in your children/grandchildren's hands. Partnerships may also provide education to your children/grandchildren regarding investments/taxation.

 

Make a Will

A well considered and structured Will is essential and can ensure that assets pass to your beneficiaries in a tax efficient way and also possibly reduce the likelihood of claims against your estate. That said, it is very important that you consider the tax and legal implications of your Will.