Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.

Tax due on legacies

I am confused about the application of capital acquisitions tax on legacies. I was left £150,000 (€190,461) by my father, who died in May 1998. No tax was deducted as the legacy was well within the tax-free threshold of circa £190,000. In March 1999, my aunt died and left me £20,000. The solicitors to her estate were informed of my father's legacy and withheld £4,000 from the payment of the second legacy pending settlement of CAT. My understanding is that there is a tax-free threshold of £25,000 on legacies payable to nephews. I am therefore perplexed as to why it was necessary to make a provision for CAT. Can you enlighten me as to what amount of tax will be due on this legacy, if any, and also the reason why it is due?

Mr M.L., Dublin

The point you raise is one which seems continually to confuse people and I can only assume it is because the solicitors involve fail to explain the mechanics of capital acquisitions tax (CAT), more commonly known as inheritance tax, or gift tax.

The most important thing to remember about the tax is that it is cumulative. That means that inheritances or gifts that you have already received are taken into account when assessing whether any particular sum is liable to capital acquisitions tax. As you say, different sums are receivable free of tax and these sums vary from year to year. There are always a few exceptions but, broadly speaking, bequests from parents to children from parents in the years relevant to your question would have been either £189,000 or £192,000, putting your £150,000 legacy well within the tax-free limits.

Turning to your aunt's bequest, the tax-free limit in 1999/2000 for inheritances or gifts passed to nephews, nieces or to siblings was, as you mention, £25,000. However, as CAT is based on cumulative figures, the authorities will add the £20,000 bequeathed by your aunt to the £150,000 received from your father. This means your starting point for the new bequest is £150,000 and that the whole of the second bequest is taxable.

Ironically, had the deaths occurred the other way around, you would have faced no tax bill. The £20,000 from your aunt on its own was below the relevant limit and your father's legacy, had it come later would still only have brought the total to £170,000, below the limit again for inheritances from parent to child. Such are the vagaries of the tax system.

Basically once you received your father's legacy, you were always going to be over the limit on other sums left to you.

Turning to the tax rates. At the time you received your inheritances, the tax was levied at 20 per cent for the first £10,000 above the threshold, 30 per cent on the next £30,000 and 40 per cent on anything above that. Looking at your £20,000, you would pay £2,000 on the first £10,000 and £3,000 on the balance of the £20,000, a total tax bill of £5,000.

Not that it will be of any consolation to you but the rates have been cut in the last Budget. In one of the more controversial features of the Budget, the Minister has imposed a flat rate of 20 per cent on all gifts and inheritances above the tax-free thresholds.

The thresholds themselves have been altered significantly, especially for parent to child which rises to £300,000. Bequests to siblings, nieces, nephew and grandchildren are tax free up to £30,000 and all other recipients receive a £15,000 threshold.

The threshold changes would not have helped you as the tax is still assessed on cumulative inheritances but the lower rates would have saved you £1,000.

Tracing old accounts

Further to the answer a couple of weeks ago on tracing long dormant accounts in old banks which have since merged, a couple of points have since arisen.

The first is that AIB tells me, customers should contact the AIB branch in the town in which the original account was held or the one closest to it. They should provide as much information as possible as some accounts will have changed numbers in merger and growth down the years. The good news for the customer is that the bank tells me it is dealing with queries on dormant accounts all the time, so they should be pretty adept at finding them and restoring any funds to the rightful owners.

Given the number of dormant accounts apparently out there, it might be of interest to note that the Irish Bankers' Federation has produced a Dormant Account Claim Form. This is a standardised form, designed to elicit the information required by the relevant bank or building society in tracing your account.

The form should be sent to the branch of the bank in which you believe you have dormant funds - or in which dormant funds exist to which you believe you have legal claim. Upon receipt, the bank will acknowledge your application and investigate the claim. It may contact you for further information if necessary. This is particularly so if the account to which you are laying claim is not in your own name - say that of a deceased parent or other relative. In such cases, you will of course have to show evidence of your right to any funds that may exist.

Sometimes, you may not know the branch or even the bank in which accounts may have been held and, of course, some banks may have merged since the account was first opened. The banks do have a tracing service to reach across the sector in search of dormant accounts. There may be a charge for such a service, so it is best to gather as much information as possible before approaching the bank. Old statements, deposit books, letters, receipts, cards etc will help.

If and when the funds are traced, the bank will let you know the balance of the account and any interest due. It will also let you know how you can access the funds. Remember, the fact that a figure appears in a deposit book or cheque book stub means nothing. In the old days of personal banking where local staff had more time to get to know customers, and before more stringent rules were introduced in recent years to combat money laundering, it was quite possible to withdraw money from deposit accounts without having the relevant book to hand. The book may need to be updated.

Copies of the form are available through bank branches.