Some inheritance tax bills more onerous than others

Personal finance columnist Jill Kerby is looking at the issue of inheritance tax...

Very few people actually like paying taxes, but one tax that is particularly disliked, especially by homeowners who may have struggled to fund downpayments, stamp duty and annual property tax with after-tax income, is inheritance tax, ie Capital Acquisition Tax (CAT).

No matter what your net worth, the consensus seems to be that it’s just unfair that after a lifetime of paying income tax, sales taxes, PRSI, emergency taxes and levies like the USC, car tax, property tax, excise taxes on petrol, capital gains tax on the sales of assets, etc, that when you die whatever you leave your loved ones will be further taxed, this time at a rate of 33% on the balance of the value of your estate that exceeds the CAT-free limit.

That limit is now €335,000 on Group A inheritances between parents and children; €32,500 in Group B between children and parents, siblings and other linear descendants and just €16,250 under Group C for ‘strangers’ – who don’t fit into the other two categories.

Before the 2008 economic crash those figures were €521,208, €51,121 and €26,060 respectively; last year only about €494 million was collected in CAT, a tiny percentage of all the tax collected by the state.

Even though the Group A threshold has been raised in recent years - it was as low as €225,000 between 2012 and 2015 and reflected the drop in property values – there is no sign that the CAT thresholds will be increased anytime soon: the huge post-pandemic budget deficit and national debt mean the Exchequer will be increasing even ‘minor’ taxes like this, not lowering them.

Still, it could be worse: last week in South Korea, the family of Lee Kung-hee, the chairman of Samsung who died last year, age 78, announced they would be handing over 23,000 artworks collected by Mr Lee and worth an estimated $2 billion to the state to help pay the $10.8 billion of inheritance tax on Mr Lee’s personal wealth that is due.

According to a New York Times report this bill represents more than half his wealth, “and more than three times the total inheritance taxes the government collected last year, according to Samsung.”

The late Mr Lee, (previously prosecuted regarding his own father’s death taxes) undoubtedly took every legal tax planning route possible during his lifetime to mitigate this tax bill, but such is the size of his wealth that it’s no surprising his heirs are still scrambling around to find the cash to meet this particular bill.

Compared to South Korea, with the highest inheritance tax rate in the world along with Japan, Irish CAT at 33% looks very generous. But as with the low earnings threshold here before the highest income tax rate kicks in, because the amount you can inherit tax-free, even from a parent, is relatively modest compared to the value of property theses days. Transfers between spouses are tax-free, but an entire estate passed onto a single child in particular or between siblings who may have been sharing a family property could end up in the sale of that home to pay the tax.

The best ways to avoid any nasty inheritance tax surprise is to hire a good solicitor and financial adviser with tax planning experience. The former will ensure that you write a water-tight Will laying out your intentions and the latter, to mitigate any tax bill, both during your lifetime and after death. (Dwelling house CAT relief, for example, may be available where a person who has shared the family home for at least three years with the owner before their death and does not own property of their own is left that property in the deceased person’s Will.)

Without a Will your heirs are at the mercy of the Succession Act 1965 which sets out who inherits what proportion of your estate: in Ireland a wife inherits two thirds and the balance is divided equally with any children. (The opposite applies in South Korea.) With a Will, a legal spouse inherit at least 50% of the estate, but there is no legal requirement to leave anything to one’s children.

The best way to avoid enriching the State upon your death is to distribute and transfer your assets, especially cash assets, in the form of gifts during your lifetime under the existing CAT thresholds. You can also give them, and anyone else you wish an annual, tax-exempt gift worth €3,000. Anyone with a lot of surplus cash and a large family or friends can disperse it easily enough this way every year, with no lifetime implication for threshold limits.

Taking out a Section 72 and 73 insurance policy, the proceeds of which will discharge any inheritance tax liabilities is another way for heirs to avoid a tax bill, but this requires a careful ongoing review of your wealth to make sure both sides of the CAT ledger match.