Benjamin Franklin is often credited with the old adage that the only certainties in life are death and taxes. And very often in Ireland when a relative passes away, a tax bill may need to be paid where a property is inherited.
Inheritance tax or Capital Acquisition Tax (CAT) is required to be paid if the beneficiary receives an inheritance over a certain threshold. There are different categories of threshold depending on the relationship between the donor and the recipient of the inheritance.
Is the family home subject to inheritance tax?
The short answer is yes. It sometimes comes as a surprise to many when they find out that the family home is not exempt from inheritance tax. Quite often those who have been given the family home through a will need to sell the property in order to pay the tax liability that arises.
CAT may need to be paid based on what each individual beneficiary has received and the tax free threshold that they fall into. Inheritance tax is set at 33% in Ireland and is paid once the recipient has used up their lifetime threshold. There are limited circumstances where inheritance tax may be exempt – such as the dwelling house exemption but the rules are strict. For example, a child wishing to inherit a home worth €500,000 tax free would need to live in the family for three years leading up to the inheritance. In addition, they would not be allowed to own any other property and must reside in the property for six years after they take ownership – and are precluded from owning another property during the six year period.
What are the main threshold categories?
A child of a parent can inherit up to €335,000 in a lifetime without being required to pay CAT. For example, if a parent leaves the family home, valued at €300,000, to an only child, there is no tax liability assuming that no other gifts have previously been received from the parent. Tax is only paid on amounts above the €335,000 threshold at a rate of 33%. In the case where a child inherits the family home valued at €400,000, the tax bill would come to €21,450. (€400,000 – €335,000) x 33%. Where three siblings inherit a home valued at €700,000, and haven’t been the beneficiary of a previous will, there will be no tax to be paid as each child inherits a share in the property valued at €233,333 which falls below the tax free threshold.
A different tax free threshold applies to non-direct family members of the donor. The tax free threshold for Category B recipients is €32,500 and applies to sisters, brothers, nephews and grandchildren of the donor. If the donor gifts their home to a large number of nephews and nieces, they may be no need for the beneficiaries to pay tax. For example, a home valued at €200,000 divided equally among seven nephews and nieces, wouldn’t result in a tax bill as each recipient would each receive a share of €28,571 which is below the threshold of €32,500. Any inheritance received over €32,500 would be liable to tax at 33%.
Those falling into Category C would be friends and relatives-in-law of the donor. The threshold is €16,250. Should a person within this category inherit an estate worth €300,000, the tax liability would come to €93,637.50 (€300,000 – €16,250 = €283,750 taxable at 33%)
Can I receive a gift from my parents without paying tax?
If a parent would like to reduce the tax liability of their children in the future, they could take advantage of the small-gift exemption which allows a person to gift up to €3,000 a year tax-free. For example, two parents could make an annual gift of €3,000 to each of their two children without the need of the children to pay tax on the gifts. Over ten years, this could equate to €120,000 being taken of the parent’s estate resulting in a potential CAT saving of nearly €40,000. Annual gifts below €3,000 do not need be declared, regardless if you are self-employed or in PAYE employment. Any gifts above €3,000 are subject to CAT.
Is there a limit to the annual amount that can be given to a child?
A parent can gift more than €3,000 to a child in one year but any amount over the threshold of €3,000 will count towards the lifetime €335,000 limit. For example, a parent could gift €25,000 to two children to help them each buy an apartment and there wouldn’t be a tax liability. And upon the death of the parent, the children could inherit a share of the family home up to €310,000 (€335,000 – gift of €25,000) each without incurring a tax bill.
It is always a good idea to seek independent professional legal/tax advice if you receive an inheritance and are due to pay CAT.