Inheritance tax, or Capital Acquisitions Tax (CAT) as it’s officially known in Ireland, is a tax applied to inheritances and gifts received. This tax can be a source of concern for those inheriting assets from loved ones or passing on wealth to the next generation, but understanding the rules, exemptions, and tax-free thresholds can help with planning and reduce financial strain.
Here’s a comprehensive look at how inheritance tax works in Ireland and how you can plan for it.
What is Inheritance Tax (CAT) in Ireland?
In Ireland, inheritance tax is governed by Capital Acquisitions Tax (CAT). CAT applies to both inheritances (assets passed on after someone’s death) and gifts (assets transferred while the giver is still alive). This tax is payable by the recipient, meaning it’s the responsibility of the person receiving the inheritance or gift, not the one giving it. The current rate of CAT is 33%, which applies to any amount exceeding the tax-free threshold allocated for the beneficiary’s relationship to the giver.
Understanding CAT Thresholds and Tax-Free Groups
The tax-free threshold is a specific amount that a person can inherit or receive as a gift without paying tax. Ireland has three tax-free groups or categories, each defined by the relationship of the person receiving the inheritance to the person giving it. The closer the relationship, the higher the tax-free threshold, meaning that immediate family members can inherit more before facing taxes.
Here’s a look at each group and their respective thresholds:
Group A: Parent to Child
This group includes children inheriting from their parents. In some cases, it can also include foster children or stepchildren.
Tax-Free Threshold: €335,000 (as of 2024).
Anything above this threshold is subject to a 33% CAT.
Group B: Close Relatives
This group includes siblings, nieces, nephews, grandparents, and grandchildren.
Tax-Free Threshold: €32,500.
Any amount above this threshold is also taxed at 33%.
Group C: Distant Relatives and Unrelated Individuals
This group applies to everyone else, including friends and distant relatives.
Tax-Free Threshold: €16,250.
The same 33% CAT rate applies to any amount above this threshold.
Example of How CAT Thresholds Work
Imagine John inherits €400,000 from his father. Since John is classified under Group A, his tax-free threshold is €335,000. The remaining €65,000 (i.e., €400,000 – €335,000) will be subject to the 33% CAT, resulting in a tax liability of €21,450.
Reliefs and Exemptions from CAT
Ireland offers a range of reliefs and exemptions that can help reduce the CAT liability. Here are some of the most common ones:
Dwelling House Exemption
This exemption applies to a house that the beneficiary inherits and was living in at the time of the deceased’s passing. For the dwelling house exemption to apply, the beneficiary must continue to live in the home for six years after inheriting it.
If eligible, this exemption allows the beneficiary to inherit the house free from CAT, but it only applies if certain conditions are met, such as not owning another home and living in the inherited home for three years before the inheritance.
Agricultural Relief
For those inheriting agricultural property (like farmland), Agricultural Relief allows for a 90% reduction in the value of the inherited land or property when calculating CAT.
To qualify, at least 80% of the beneficiary’s total assets after the inheritance must be agricultural. This is beneficial for families passing down farms and agricultural assets, ensuring they stay in the family without large tax burdens.
Business Relief
Business Relief provides a 90% reduction in the taxable value of an inherited business, making it a valuable relief for those inheriting a family-owned business.
To qualify, the business must be actively trading, and the beneficiary must retain the assets for six years after inheriting. This relief is designed to ensure that businesses stay within families without a significant tax burden.
Small Gift Exemption
Each year, a person can receive gifts up to €3,000 tax-free from any individual. This exemption is particularly useful for passing on wealth gradually, as parents can gift €3,000 per year to each child without impacting their lifetime threshold or paying CAT.
Paying Inheritance Tax and Filing a CAT Return
If you inherit or receive a gift exceeding the tax-free threshold for your group, you’ll need to file a CAT return with Revenue and pay any tax due. Here are the essential steps:
File Form IT38: The beneficiary is responsible for filing this form, which outlines the details of the inheritance, the relationship to the deceased, and the tax due.
Payment Deadline: CAT for any gifts or inheritances received between January 1 and August 31 of a year is due by October 31 of that year. For assets received between September 1 and December 31, the CAT is due by October 31 of the following year.
Payment Options: Revenue offers payment flexibility, including installment options if paying the full tax amount in one lump sum isn’t feasible. In some cases, Revenue may allow the sale of inherited assets to pay CAT, especially for significant property inheritances.
Planning Ahead for Inheritance Tax
With the right planning, families can significantly reduce their inheritance tax liability:
Use Small Gift Exemptions: Parents or grandparents who plan on leaving an inheritance can start transferring assets early, using the annual €3,000 small gift exemption to gradually transfer wealth to family members without affecting thresholds or incurring tax.
Leverage Reliefs: If you’re passing down a family farm or business, ensure the beneficiary meets the requirements for Agricultural or Business Relief, reducing the taxable value by 90%.
Create a Will and Consider Life Insurance: Creating a detailed will can help beneficiaries better understand what they’ll inherit and manage any CAT responsibilities. Additionally, some people take out life insurance policiesspecifically to cover inheritance tax, providing a payout that beneficiaries can use to settle any CAT liabilities without liquidating assets.
Conclusion
Inheritance tax in Ireland can seem complex, but with an understanding of the CAT thresholds, rates, and available reliefs, beneficiaries can plan ahead to reduce the tax burden. By taking advantage of exemptions and being proactive about planning, families can preserve assets, protect wealth, and ensure a smoother transfer of inheritance. Always consider consulting a financial advisor or tax expert for personalized advice, especially when managing large inheritances or complex family estates. With a strategic approach, you can minimise the impact of inheritance tax and safeguard the assets that are meant for the next generation.
