Inheritance and gift tax is an issue that can generates a certain amount of heated debate.
One side – a minority, I would suggest – insist that unearned income deserves to be heavily taxed; the other side, meanwhile argues that that everyone should have the right to pass on their property and assets to anyone they want, ideally tax-free.
For the latter camp the strongest argument is that the assets accumulated during a lifetime have probably already been taxed to the hilt.
Certainly in the case of a family house that you wish to leave or give a child, the property would probably have been purchased (and the mortgage paid) with taxed income and DIRT tax would have been further paid on the savings that went into the down payment.
The owner would have also probably paid Stamp Duty, property tax and local authority charges and their after tax income would have to pay for the insurance, maintenance and upkeep of the property.
These are the arguments that have convinced 13 OECD countries/tax jurisdictions since 2000 to abolish estate/inheritance tax altogether, including high income tax Nordic countries like Norway and Sweden.
Others countries with nil-inheritance tax (since 2000) include Austria, Brunei, Estonia, Hungary, Israel, Luxembourg, Mexico, Portugal, Serbia, Slovenia, Russia, Hong Kong, Macau. There is no inheritance tax in Australia, Canada, New Zealand or the Gulf states.
Others have a very low tax rate – with or without tax-free thresholds – such as Italy (4%), Poland and Switzerland (7%), Iceland (10%), Denmark (15%), Finland (19%), Netherlands (20%). Here our capital acquisition tax (CAT) is the seventh highest in the OECD at 33% and the tax-free threshold between a parent and child is just €225,000, less than half what it was in 2009. (It is also €30,500 for other lineal relatives and just €15,075 between strangers.)
In Germany, where inheritance tax is 30% (the eighth highest) the threshold is €380,000; in the UK the tax is 40% but the tax-free threshold is nearly €454,000 (and can be avoided by gifting away your assets during your lifetime.) In America, there is no tax (40%) on estates worth up to $5.4 million.
Inheritance and gift tax exemptions also vary between countries. In Ireland they are few and far between though agricultural and business reliefs are the most important because they allow family enterprises to be passed down unencumbered.
There’s also the annual €3,000 gift exemption (c€10,000 in the USA) which allows anyone to gift or receive a maximum individual gift worth that much. It can be a very useful tax planning tool for everyone who wants to lower the tax burden on their loved ones.
And then there is the ‘Dwelling House’ CAT exemption.
Recently, I received a letter from a reader, a widow, whose son had been living for several years in a property she owned next door to the original family home in which she still resided. He was paying all the utilities and taxes and she wanted to transfer the deeds to him and wondered if he would have to pay any tax.
The dwelling house CAT exemption for inheritance/gift purposes applies to people who have lived with the owner (the ‘disponer’) for at least three continuous years prior to the disponer’s death and who at the time of the inheritance/gift was not the owner or part-owner of any other property.
They must also keep the property for six of the next seven years before disposing of it.
In the case of a gift of a dwelling-house, the CAT rule changed in 2007. Unless the beneficiary has been living in the only property or family home of the owner, and the owner/disponer is over age 65 and is dependent on the proposed beneficiary due to their age and infirmity, the gift will not be tax-free.
However, a disponer of any age can gift someone another property they own in which the beneficiary (who doesn’t have to be a relative) has been living for at least three previous years and fulfils the other conditions for the tax-free gift – that is, that they have never owned a property of their own when the gift is given and keeps the property for at least six out of the next seven years.
In the case of our reader, the son therefore can be gifted the second property tax-free and the gift will not impact on his usual €225,000 tax free inheritance threshold from her. The mother will be liable to 33% capital gains tax however on the difference between the original value paid for the property and its market value at the date of the transfer to her son.
This is an extraordinarily generous CAT/gift exemption, admit financial planners, since it means that anyone can leave a person (a relative or not) a second or multiple properties of any value tax-free so long as the beneficiary has lived in it for three continuous previous years and fulfils the other dwelling house exemption conditions.
It is also a hugely disproportionate tax break that only multiple property owners – people with existing means – will enjoy.
Should the Minister for Finance ease up on the CAT-free thresholds and the CAT rate in next month’s Budget?
Many believe he should as property prices keep rising and CAT bills soar. Tightening up the anomalous dwelling house gift rule might help him justify such a contentious decision.
If you have a personal finance question for Jill, please email her jill@jillkerby.ie or write to her at The Munster Express, 37, The Quay, Waterford, X91 DC83.
