This week I’ll look at some tax tips for Inheritance Tax. Over the last two weeks, we introduced you to the Toners, Timmy the dad, and his wife Fidelma. They have two sons, Gary and Shane who are in college. To recap, Fidelma works part-time as she loves the gym and gets a great buzz off Pilates & Yoga. She’s looking good for it too.
The reason she works part-time is that she spends a few hours each day looking after Timmy’s mother, Nuala. Nuala is a brutally honest woman. She isn’t shy about telling Timmy that he needs to spend less time in the pub. Nuala is 85 years old and while in good health, her mind is not as good as it was, and her hearing is failing a bit too. Her other son, Mike, lives in Killarney and he has one son Toby. Mike divorced Mary about 10 years ago now. Nuala wants us to look at the inheritance tax her sons would pay if she passed away. Let’s look at
- Nuala assets
- Inheritance Tax now
- Small Gift Exemption
- Maximise Group Thresholds
- Gift to Timmy now
- Dwelling House Exemption
- Summary
Nuala’s Assets
Nuala’s assets are the family home worth about €400,000 and €800,000 in various bank and credit union accounts. So, her assets come to €1.2 million. Dividing that between Timmy and Mike would give them €600,000 each. She wants to understand the tax liability that they’d have if she didn’t wake up in the morning.
Inheritance Tax Now
Let’s assume both sons have the full parent/child Group A threshold available.
| Value of inheritance – Timmy | €600,000 |
| Less Group A threshold | €335,000 |
| Taxable Inheritance | €265,000 |
| Tax Payable 33% | €87,450 |
So, Timmy and Mike would have an Inheritance Tax liability of €87,450 each which is a total of €174,900. Nuala’s current will divides her estate in this way leaving all her assets equally to the two lads. When she sees the amount of tax she’s not a bit impressed. Her question is
“What can we do to reduce this liability, while making sure they get an equal split as much as possible”?
Small Gift Exemption
The small gift exemption is an annual amount that Nuala could give to family members tax-free. It is €3,000. Say, she decides to give €3,000 to Timmy, Fidelma, their two lads, and Mike and Toby. That comes to €18,000 a year. If she lives for another 6 years.
| Gift of €3,000 to 6 in the family | €18,000 |
| Number of years she gifts | 6 |
| Total value of gifts | €108,000 |
| Inheritance Tax saving 33% | €35,640 |
The cash value of Nuala’s savings would reduce by €108,000 from €800,000 to €692,000. She needs to be careful to ensure she pays this each year. The small gift exemption doesn’t carry from year to year. I wrote about this when a taxpayer lost his case against Revenue.
Nuala thinks that if she gives Gary and Shane €3,000 per year when they are in college, they could go mad!
“Those lads would lose the run of themselves and could spend it all on drink. Or worse, drugs”
To ease her fears, she could pay the student contribution for each of them. They, of course, would prefer the 3 grand in cash as the old lad pays the college fees. Timmy and Fidelma love this suggestion as it would save them €6,000. Plus, they’d get €6,000 from Nuala as a gift. So, a €12,000 swing in their favour. Timmy can’t wait to tell the two lads about this one.
Maximise Group Thresholds
Another Tax tip for inheritance tax is to maximise group thresholds. The Group Thresholds are
- Group A – Parent to Child €335,000
- Group B – Blood relative/lineal ancestor €32,500
- Group C – No relation/stranger €16,250
So, rather than split her estate 50:50 between Timmy and Mike she could include a clause in her will to leave
| Fidelma | €16,250 |
| Shane | €32,500 |
| Gary | €32,500 |
| Toby | €32,500 |
| Total | €113,750 |
| Tax saving 33% | €37,538 |
Maximising the thresholds coupled with the small gift exemption saves tax of €73,178.
Inheritance Tax Calculation
To show you the savings I’ll look at Timmy’s inheritance tax calculation. This is after the gifts and using the available thresholds.
| Value of Nuala’s assets | €1,200,000 |
| Less Gifts over 6 years | €108,000 |
| Less inheritances – family | €113,750 |
| Net to Timmy & Mike | €978,250 |
| Timmy 50% | €489,125 |
| Less Group A threshold | €335,000 |
| Taxable inheritance | €154,125 |
| Tax payable 33% | €50,861 |
If Nuala did nothing Timmy’s inheritance tax liability is €87,450 and now it is €50,861. A saving of €36,589 for Timmy and €36,589 for Mike or €73,178 in total.
Gift to Timmy now!
It could be of greater benefit if Nuala gave a gift to Timmy now. If you read our blog about tax refunds, you’ll remember that the Toners had a lot of outgoings. Plus, they were looking to buy a rental property and were short €100,000. The plan was to borrow that from the bank. If Timmy and Fidelma borrow this money it will cost them about €35,000 in interest over 15 years at 4.3%. Plus, they have to repay the capital too.
Compensate Mike
Nuala’s main concern was to make things as tax-efficient and as equal as possible for her two sons. If Nuala gives €100,000 now to Timmy, she could also give €100,000 to Mike. Both of these gifts are less than the threshold so there’s no tax to pay although they do eat into the threshold.
| Gift to Mike | €100,000 |
| Less small gift exemption | €3,000 |
| Group A threshold used | €97,000 |
| Group A threshold | €335,000 |
| Balance of threshold available | €238,000 |
Nuala could gift Mike the money now or give him €100,000 more in her will.
Dwelling House Exemption
As part of our meeting, I tell Nuala about the dwelling house exemption. Mike is a paramedic in Killarney and has rented a house down there from the time he got divorced. Paying rent is a big drain on his finances and has been looking to move back to Waterford. It makes sense for him given that Toby is starting an apprenticeship in Wexford later this year.
He was thinking of moving home to live with Nuala but thinks it would be difficult the way the house is. Nuala mentions building a “granny flat” attached to the main house where either she or Mike could stay. This opens the possibility of Mike inheriting the house as part of his share of the inheritance. With his medical training, he’d be available to look after his mam when not working. Also, it would take the pressure off Fidelma as she’s getting into Hyrox now and wants to train for Gdansk.
Qualifying conditions
For Mike to be exempt from Inheritance Tax there are a few qualifying conditions
- The house was Nuala’s only or main home
- Mike lived in the house as his only or main home for 3 years before Nuala dies
- Mike doesn’t own any other house
- He doesn’t get another house from Nuala
- The house continues to be Mike’s only or main home for 6 years after the date of inheritance.
This last rule doesn’t apply if
- Mike is over 65 at the date of the inheritance of
- He has to move elsewhere because of work or
- He has to live elsewhere because of physical or mental infirmity
The dwelling house exemption appeals to Nuala but will discuss it further with the lads. She’d love to know how the numbers would look if this exemption was a runner. And rather than give Mike €100,000 she would spend that on the house to fix it up. Sure, this would be Mike’s anyway!
Inheritance Tax Liability
| Value of Nuala’s estate | €1,200,000 |
| Small gifts | €108,000 |
| Gift to Timmy | €100,000 |
| Money spent on house | €100,000 |
| Inheritance – other family members | €113,750 |
| Net Value of estate | €778,250 |
| Value of home – exempt | €500,000 |
| Taxable Value of estate | €278,250 |
Nuala could decide that she wants to give Timmy all the cash as Mike will get more than him. In that case, Timmy’s inheritance tax liability would be
| Value of inheritance | €278,250 |
| Less Threshold balance | €238,000 |
| Taxable inheritance | €40,250 |
| Tax payable 33% | €13,283 |
Or she could leave €40,250 to Mike and he’d pay no tax on that as he still has his full threshold. Timmy wouldn’t pay any inheritance tax either. His remaining threshold would cover the inheritance.
Summary
With some careful planning, you can reduce inheritance tax liabilities down the line. There’s a balancing act here. The parent must remain with enough assets, so they have security. They could need cash for medical or nursing home care in later years. Saving tax is nice and receiving a gift is even nicer. But it’s important that the giver understands and is comfortable with any plan. It shows the importance of good communication in a family. Plus, legal and tax advice will help you understand what you can and can’t do.
If you can save money with these tax tips, that’s brilliant. But if you need specific advice, start here
