Property ownership has been one of the key drivers of wealth creation in Ireland over the last 20 years and it remains a huge component of personal wealth in this country. It comes as no surprise, therefore, that keeping property in the family is such an important objective for so many people in succession planning.
As we saw in the downturn, property values plummeted rapidly and many beneficiaries had to make forced sales at rock-bottom prices. Clients increasingly seek advice on how they might avoid forced property sales to meet tax liabilities which can, in turn, reduce family wealth materially. We have outlined some of the most popular ways for clients to protect property wealth across generations.
Transferring the family home or a single residential property to a child
In cases where parents wish to transfer a family home or single residential property to a child normal CAT rates apply over and above tax-free thresholds - with one significant exception. Under Dwelling House Relief, a property can be gifted/inherited without the beneficiary paying tax, provided that certain conditions are met. Since 25 December 2016 this limited exemption applies to:
- A gift of a dwelling house to a relative aged 65 years or over.
- A gift of a dwelling house to a relative who is permanently and totally incapacitated.
- An inheritance of a dwelling house which was occupied by the giver as his/her only or main residence at the date of his/her death (except in the case of a gift or inheritance taken by a dependent relative).
Provided that the beneficiary:
- lived in the dwelling house as his/her only or main residence continuously for three years immediately preceding the date of the gift/inheritance; and
- does not have an interest in any other dwelling house at the date of gift/inheritance (in Ireland or abroad) and in the case of an inheritance, inherits an interest in only one property.
The beneficiary must continue to own and occupy the dwelling house as his/her main residence throughout the period of six years commencing on the date the benefit is taken otherwise the exemption is clawed back. This condition does not apply to a beneficiary who is 65 years or over on the date the benefit is taken. Relative is a lineal ancestor, lineal descendant, brother, sister, uncle, aunt, niece or nephew of the giver or the spouse or civil partner of the giver.
There is a CGT/CAT offset rule which might arise on the transfer of a property during the giver’s lifetime. If parents are considering gifting a property during their lifetime to a child, the CGT due can be credited against the CAT liability arising, provided the asset is not disposed of within two years starting from the date of the gift. The giver or parents may therefore need to consider how the CGT liability from a transfer will be funded especially as no proceeds from the transfer will be available immediately to the parent or child to settle the tax liabilities arising, because we must assume that the child is not paying for the property.
Funding the tax liability on behalf of your children via an early transfer
We have already discussed how Section 73 plans can be used to transfer property assets while living to help adult children get on the property ladder and have their gift tax paid for them. Section 73 plans also allow for the early transfer of property that would eventually be part of any inheritance, but without future capital gains accruing. That means (assuming increasing property values over time) a smaller tax liability on the same asset due to the timing of the transfer. Also, other taxes need to be considered in relation to this gift such as CGT and Stamp Duty.
Transferring property via inheritance using a life assurance policy
A Section 72 life insurance plan is a policy to cover the inheritance tax bills of the beneficiaries of your estate. Therefore, it allows those beneficiaries to inherit assets without then having to find the money to pay a significant tax liability. This might be useful where the beneficiary does not want to sell assets to pay their tax bill or it is difficult to do so quickly - for instance, if they inherit property. Any proceeds of the Section 72 policy not used to pay inheritance tax will be subject to CAT.