What will you leave when you die – a legacy or a tax bill?
To quote Benjamin Franklin, “in this world nothing can be said to be certain, except death and taxes.” However the good news is that both of these don’t necessarily have to occur together!
This is one area that we’ve been getting a lot of queries about from people. As they start to think about their mortality and what they are going to leave behind for loved ones after they’re gone, our clients want to ensure that they leave a lasting positive legacy, rather than a nasty tax bill!
The reason we’ve been getting quite a number of queries about this area of personal finance is because it featured in Budget 2017, but maybe not to the extent that everyone hoped.
Inheritance Tax in Ireland today
Back in the heady days of 2009, a parent could leave up to €542,000 to each of their children (smaller thresholds apply for other relationships) before inheritance tax had to be paid. The tax that had to be paid was 20% of any excess over this amount. And then the economic crash happened… As a result, the parent / child threshold was slashed over a few years to a threshold of only €225,000, above which an increased tax rate of 33% had to be paid.
This caused all sorts of problems for people wanting to leave assets, particularly to a single child, and where their wealth was tied up in a single property. In many cases, the low threshold resulted in a family home having to be sold by a bereaved child, simply to pay a tax bill!
Fast forward to budget 2017 and there were great hopes around the parent / child threshold being increased back up above €500,000. This didn’t happen, however the threshold has been gradually increased over recent years up to €310,000 now. Unfortunately the tax rate has stayed stubbornly high at 33% of amounts above the threshold.
The situation is not so bad where there are a number of children inheriting from a deceased parent, as the threshold amount applies to each individual child. It’s important also to note that there is no inheritance tax payable by a bereaved spouse. There are also exemptions available when a farm or business are being inherited and in some circumstances where a child is living in the house to be inherited, so it’s important to get advice about these situations.
You need a plan
So if after you’re dead and buried, it is likely that the value of your assets will exceed the inheritance tax thresholds of all your children, you should come and talk to your LHW financial planner. The first thing he will do for you is ensure that before you start thinking about giving money away, you have enough to do all the things that you want to do in your lifetime. The 1st rule of estate planning in LHW is SPEND IT! You should also plan for ill health and other unforeseen eventualities. After all that it is still possible to leave a lasting legacy rather than a tax bill, but this situation needs careful planning. Thankfully there are a few ways that we can help you.
You first of all want to ensure that your assets are distributed exactly in accordance to your wishes. To ensure this happens, make sure you have a will as this will clearly set out your wishes.
Spread the love (and the money)!
When you’re writing your will and particularly if your assets are significant and it’s in accordance with your wishes, spread your inheritance also among grandchildren, parents, siblings, nephews and nieces as each of these will qualify for a tax free threshold of €32,500. Even outside of this, other people will qualify for a further reduced threshold of €16,250. The threshold amounts are lower… but it all counts! So spreading the love can reduce the tax bill payable later.
Don’t leave it all until death!
Another way to reduce or avoid a tax bill on death is to pass on assets at an earlier stage. First of all, every individual can gift €3,000 p.a. to another individual without triggering a tax bill for the recipient. So parents can gift each of their children €6,000 each year. This can build up over time… Of course also passing on property at an earlier stage may result in it being passed on while asset values are lower, as property values generally increase over time.
Get appropriate life cover in place
There are life assurance policies designed specifically to pay inheritance tax bills called Section 72 policies. These may well be the best route if your assets are significant, and your beneficiaries are likely to inherit amounts in excess of their thresholds. We can help you get this cover in place.
Dying is a serious business! If what you leave behind is important to you, then an inheritance strategy is needed. LHW is happy to help you leave a really positive legacy after you.