I am a single person with no dependents or children. My estate will be considerable with two houses \u2013 one of which I intend to sell in 2026. How best can I distribute this again to avoid the majority of the estate going to Revenue.<\/p>\n
Can I annually gift \u20ac3,000 to many people \u2013 eg. relatives children, friends\u2019 children, friends etc. etc \u2013 or must they be relatives \u2013 i.e. niece or nephew only?<\/p>\n
Ms B.J.<\/p>\n
Human nature dictates that people want to make sure as little as possible of what they own goes to the taxman \u2013 in life or afterwards. <\/p>\n
Inheritance tax, globally, is a fairly modest social policy measure designed to mitigate the financial inequality that can occur when someone receives great wealth through inheritance due to accident of birth, without having done anything themselves to earn it. Many people agree with that sentiment \u2013 until, of course, it is they \u2013 or the beneficiaries of their estate \u2013 who will be taxed on such an inheritance.<\/p>\n
The first thing to note is that in no case is the \u201cmajority of the estate going to Revenue\u201d. The inheritance tax rate \u2013 more formally known as the capital acquisitions tax rate \u2013 over and above a range of tax exemptions that we will go into in a minute, is 33 per cent. So the maximum Revenue can take in tax from your inheritance is a third.<\/p>\n
However, for someone with a substantial estate, that still amounts to a serious chunk of tax. And with two houses before you consider any other assets, your estate will, as you say, be substantial.<\/p>\n
There are ways to minimise what portion of your worldly wealth will go to Revenue, though it does require more effort than it would do for people who have a spouse or children.<\/p>\n
In Ireland, a spouse can inherit everything tax free and child can inherit up to \u20ac400,000 from their parents free of tax under current inheritance tax exemptions. That figure can and has risen and fallen in good economic times and bad as determined by the Government of the day.<\/p>\n
People who are not your children but are nevertheless close linear blood relatives \u2013 the nieces and nephews you talk about as well as brothers, sisters and grandchildren, or indeed grandparents \u2013 can receive up to \u20ac40,000 under current rules before being taxed.<\/p>\n
For anyone else, the threshold is \u20ac20,000 \u2013 with some exceptions, of course which we will come to later.<\/p>\n
What matters is the person\u2019s relationship to you. What they might already have received in inheritance or gifts in excess of \u20ac3,000 from others is also very relevant.<\/p>\n
All inheritances and gifts in a particular category are totted up to see if the person has hit their tax free threshold or not.<\/p>\n
For instance, in your case, if you are looking to leave \u20ac40,000 to one of your nephews but he has already received \u20ac10,000 from another aunt or uncle, grandparent or a brother or sister, only the first \u20ac30,000 of their inheritance from you is free of tax. <\/p>\n
But nothing that he has previously received from a parent or a more distant relative (such as a cousin), his in-laws or a friend will be taken into account as those inheritances are in different categories.<\/p>\n
This complicates things for you as you are looking to spread the benefit of your estate across a number of people to limit how much goes to Revenue and, as you say, you have no children, whose exemptions would allow you to pass a very significant portion of your estate on tax free.<\/p>\n
Essentially, not only do you need to spread the benefit of your estate far and wide in your will by naming as many relatives and friends as possible as beneficiaries, you also need to know how much they have previously received in inheritance from a linear relative (category B tax free limit of \u20ac40,000) or anyone else, considered in inheritance tax as a stranger (category C exemption of \u20ac20,000).<\/p>\n
In practical terms, I am not sure how you do that without sounding very intrusive of people\u2019s personal financial affairs.<\/p>\n
Small gift exemption<\/p>\n
That brings us to the small gift exemption \u2013 the \u20ac3,000 annual gift you mention. This is a very valuable tax relief and possibly the most flexible of the exceptions to general inheritance tax rules I mentioned above.<\/p>\n
So how does it work? And what, if any, are the limits?<\/p>\n
Assuming you have the ready cash to do so, you can give \u20ac3,000 each year to as many people as you like, regardless of their relationship to you. That does, of course, include close relatives, such as your niece and nephews but it could also include cousins, grandnieces and grandnephews etc.<\/p>\n
But it doesn\u2019t stop there. You are also free to gift up to that \u20ac3,000 limit to friends, acquaintances, their children, your favourite cashier in your local store, your hairdresser, a gardener, whomever.<\/p>\n
And the thing here is that you don\u2019t have to worry about whether they have received similar gifts from anyone else. The recipient could receive up to \u20ac3,000 from many people and it has no impact on their tax status.<\/p>\n
You can make such a gift every year, once only or on an irregular bases. There are no restrictions as long as the sum does not exceed \u20ac3,000 to any person in any one calendar year.<\/p>\n
Any gift received under the small gift exemption is free from tax.<\/p>\n
So if you are, indeed, selling one of your houses this year and have no need of the money yourself, you could use the small gift exemption to benefit a large number of people, while reducing the value of your estate that could be subject to tax.<\/p>\n
There is only really one important rule to consider: the gift must be for the benefit of the person receiving it, not any other person.<\/p>\n
If you gift you niece \u20ac3,000 in a year to help manage her rent bills and also gift each of her three children \u20ac3,000 with the intention of that money also being transferred to the mother for her benefit \u2013 i.e. to help her pay her bills \u2013 the \u20ac9,000 going to the kids is considered by Revenue to have been given to your niece. She will then have got \u20ac12,000 from you in one year, of which \u20ac9,000 will be set against her category B exemption of \u20ac40,000. Where that exemption is exhausted, she will have a \u20ac3,000 tax liability.<\/p>\n
There\u2019s a lot of latitude under the small gift exemption but it does pay not to try to be too smart in how you allocate the funds. <\/p>\n
The other thing to be wary of is the impact of such giving on you in terms of the cost of nursing home care should you eventually require it. The financial assessment under Fair Deal, the State system subsidising the cost of long-term nursing home care to the individual, does claw back any assets you have given away over the previous five years.<\/p>\n
If you have gifted \u20ac30,000 to 10 people over each of the five years before applying for nursing home care support, Fair Deal will assume you still have the \u20ac150,000 when assessing your financial contribution to care.<\/p>\n
Other exemptions<\/p>\n
There are other exceptions to the general rules on inheritance tax liability.<\/p>\n
Among these, the best known is possibly dwelling house relief. If someone lives with you in your main family home for three years before you die, you can leave them the house tax free in your will as long as they have no share of any other property. They must continue to live in the house (or a property bought with the entire proceeds of the sale of the house) for at least six years or Revenue will claw back some of the relief.<\/p>\n
This might be a way of leaving a very substantial benefit tax free to a favoured relative or a friend.<\/p>\n
If you have a relative who is permanently incapacitated because of a disability, they will pay no tax on anything you leave them in your will regardless of how much it is, as long as it is earmarked to meet \u201cqualifying expenses\u201d, general medical and related costs.<\/p>\n
The key here is that you would need to state in your will not just that you are leaving your money to this person but that it is for their ongoing medical care etc.<\/p>\n
Other reasonably well known exemptions include bequests to charity and heritage property. Charities are, as you would expect, well versed in how to apply for tax relief on anything left to them but you no need to make sure they are a registered charity.<\/p>\n
Heritage items are more tricky. They could really be anything \u2013 artworks, books, jewellery, even houses and gardens \u2013 but they must be of \u201cnational, scientific, artistic or historical interest\u201d and reasonable facilities must be made to allow for them to be seen by the public and others.<\/p>\n
The person receiving the heritage item will need to claim the exemption.<\/p>\n