At times, we receive enquiries that necessitate only a succinct response. A compilation of such queries are addressed herein. A question was raised regarding inheritance tax and the application of the Group A threshold of €335,000, the cumulative limit between a father and mother.
The query involved a hypothetical situation where one parent passes away when the threshold is set at €335,000 and bequeaths a part of their estate, exceeding the threshold, to their offspring. The remaining parent expires at a time when the threshold has amplified to €400,000, consequently leaving the residue of their estate to their child at a time when the threshold is more considerable.
The question that arises in such a scenario is if the initial €335,000 threshold that stood at the time of the death of the first parent is applied to the cumulative inheritances from both parents, irrespective of any subsequent threshold escalations between the parents’ dates of death?
This communication was from Mr. M.B.
Considering the current political theatrics, one could be misled into believing that the relief provided by an inheritance tax is minimal and virtually futile. However, it’s important to convey that tax-free thresholds serve as a substantial respite in matters of inheritance, particularly the most lenient threshold, Category A. This mostly pertains to inheritances or gifts larger than €3,000 given from a parent to their child.
Increasing property prices have put pressure on the government to enhance the threshold for the first time in half a decade. To address this, the Minister for Finance, Jack Chambers, will be presenting his budget on October 1st. This subject is decidedly timely.
The crucial determinant is the threshold that exists at the time of death.
Consider three hypothetical situations:
1: Imagine that your father passes away when the threshold is €335,000, leaving you an inheritance valued at €300,000. It falls under the present threshold, and is therefore tax-exempt.
In the subsequent years, for example sake, let’s assume the threshold rises to €400,000. At this point, your mother passes away and wills you an inheritance of €80,000. This now puts you over the old threshold, however, still within the revised threshold boundary, thereby avoiding any tax.
The point that surpasses the old threshold remains insignificant as that threshold becomes obsolete.
In the event of your father’s death, when the tax-free inheritance limit is set at €335,000 and you inherit assets valued at €370,000, you will be subject to Capital Acquisitions Tax. The tax applies to the €35,000 which exceeds the tax-free limit, resulting in a tax bill of €11,550.
When the tax-free threshold moves up to €400,000 after some years and your mother passes away, leaving you an inheritance of €20,000, it raises your total inheritance from your parents to €390,000. This sum is less than the new limit, hence there will not be an inheritance tax for your mother’s inheritance. However, although the total inheritance is now below the new threshold, the tax paid on the extra portion of your father’s inheritance will not be returned as it was estimated based on the limit that was valid at that time.
Assume the details are same as the previous situation except, now your mother leaves you with €200,000 instead of €20,000. This will boost your overall inheritance from your parents to €570,000. Given that this is beyond the €400,000 limit, you will be taxed on €170,000 of your mother’s inheritance, which will be a total of €56,100. The fact that you have previously paid tax on a part of your father’s inheritance, which is now below the fresh threshold, will not be considered. So, your total tax payment for both inheritances will be €67,650. Someone who inherited the same amount under the new higher limit of €400,000 will only pay €56,100.
I enjoyed reading your article, especially the part about the dwelling home exemption. According to the article, the inheritor must have stayed in the inherited property for a minimum of three years before the property owner’s death. Are there any stipulations regarding where the property owner has to reside during that period?
Yours sincerely,
Mr S.H.
The dwelling house relief is an extremely helpful tax relief. However, as you might anticipate, there are strict guidelines in place due to its potential significance to the heir.
You’ve correctly pointed out that individual eligibility requires the recipient to have resided in the property for a minimum of three years prior to the owner’s death, without any stakes in another property. For instance, owning even a fraction of a holiday home can disqualify the person. Moreover, they are obliged to remain in that property for six subsequent years after gaining the property, or in a new property bought from the complete sale of the original one.
The home owner is also bound by certain rules. Unless the beneficiary is a dependent relative, incapable of independent living, the home owner must have treated the property as their only or principal family house until their death. The legal regulations do not specify the duration for the owner’s stay in the house. It logically might need to be at least the three years the recipient resided, but the recipient could have lived there under multiple family owners.
A notable exception exists for home owners who, due to “physical or mental infirmity”, are hospitalised or in a long-term medical facility and can’t live in the property.
Gifts and compliance regulations
It is indeed possible to receive up to €3,000 annually from anyone without incurring tax. Considering this, you’re planning to gift your toddler children a yearly sum of €3,000. However, since your children are below seven years old, the bank, PTSB, stipulated that these accounts must be under your name.
The bank didn’t fully inform you though. While it is true that children this young can’t have accounts under their names, PTSB permits the child’s name to appear on the paperwork for an account opened by an adult.
This clarification will ensure both you and the Revenue recognise the account and its contained funds as belonging to the child. It’s an assurance against tax evasion. Subsequently any adult, not only a parent, can open an account for a child in their name at PTSB.
The account can be reassigned to the child once they come of age. Any questions or concerns should be directed to Dominic Coyle at Q&A, Tara Street Dublin 2, between the numbers 24-28, or communicated via email, including a return phone number in your message. Please note, this column serves primarily as a reading material for readers and does not substitute professional counselling or advice.