Property ownership is a big component of personal wealth in Ireland – and so, for many, protecting property wealth and passing it on to the next generation is a central part of their succession planning. It is therefore no surprise that clients are increasingly seeking advice on how they might avoid forced property sales to meet tax liabilities, which in turn can reduce family wealth materially. While options are limited, here we outline the most popular ways that clients can protect property wealth.
Transferring your property to a child
If you wish to transfer a family home or a single residential property to a child, normal Capital Acquisitions Tax (CAT) rates apply over and above the tax-free threshold. However, a child may be able to avail of Dwelling House Exemption. It provides that the gift or inheritance of a property can be exempt from CAT where certain conditions are met. The main conditions are set out below.
- In the case of a gift, the exemption can apply to a beneficiary who is a dependent relative – meaning someone who is permanently and totally incapacitated due to a physical or mental incapacity; or a relative aged 65 or over.
- In addition, the beneficiary must have continuously occupied the dwelling house as their main residence for three years immediately preceding the gift.
- In the case of an inheritance, the exemption can apply to a beneficiary where the disponer has occupied the dwelling as their main residence at the date of their death (this is not required where the beneficiary is a dependent relative); and
- The beneficiary has occupied it as their main residence throughout the three years immediately preceding the date of the inheritance.
In addition, to qualify for this exemption, the beneficiary must not at the date of the gift or inheritance own any other dwelling house or hold an interest in any other dwelling house in Ireland or abroad. In the case of an inheritance, further residential property to be inherited by the beneficiary from the deceased can be included in this test to deny the relief.
After the property has been transferred to the beneficiary either by way of gift or inheritance, they must continue to own and occupy it as their main residence for six years. Otherwise, the exemption is clawed back (this rule does not apply to those aged 65 or over and to other limited circumstances). This is a complex relief and many of the terms mentioned have specific definitions. Advice should be sought to determine if the relief is due.
Another consideration is the Capital Gains Tax (CGT)/CAT offset rule: if parents are considering gifting a property during their lifetime to a child, any CGT due on this same event can be credited against the CAT liability arising, provided the asset is not disposed of within two years commencing on the date of the gift. That said, the parents will need to consider how the CGT liability from the property transfer will be funded.
Early transfer: funding the tax liability
For a parent wishing to help a child during their own lifetime, Section 73 policies can be very useful. Such policies can offer the option of paying a beneficiary’s CAT bill on a gift without the payment itself being considered a further taxable gift.
Indeed, gifting property assets early has both practical and tax-efficient outcomes: a property gift made alongside a Section 73 policy provides the child with a property and a means to fund the gift tax liability. Importantly, future capital appreciation on the property will accrue to the child, for whom no charge to CAT will arise. This can work especially well when the asset being gifted does not attract a CGT liability and where the Stamp Duty liability may also be minimal.
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 an estate. Put simply, it allows the beneficiaries to inherit assets without then having to find the money to pay a significant tax liability. If the beneficiary does not want to sell assets to pay their tax bill or can’t do so quickly, it may be a useful option.
Succession planning: communication is key
Passing on property can fundamentally influence financial outcomes for the beneficiaries, so it is important to talk openly about your plans. After all, a little preparation can preserve property wealth for your children – and generations to come.
So, while succession planning may be a sensitive issue, it is essential that your children understand your plans because once they do, they can educate themselves about what they are going to receive, prepare themselves for the tax bill they may have and manage the process as effectively as possible.
This article featured in the Q1 2022 edition of Wealth Matters - our quarterly publication that presents our views on the investment landscape and explores key wealth planning themes to help build and protect wealth on behalf of individuals, families and entrepreneurs across generations.
To read or download the report in full, click here.