Generation next: how to minimise inheritance tax

We know the only two inevitabilities are death and taxes, but you can minimise the impact of both – on others at least – with a little financial planning.

"Before you go thinking about the next generation, first make sure you are okay, that you have made retirement plans, and that the old-age space and healthcare space are all covered off, as well as a contingency plan," says Andrew Fahy, head of tax and financial planning at Investec.

Do nothing and “you might fall into a relief by accident”, he says. For example, inheritance tax (CAT) allows a child to inherit up to €310,000 tax free, with anything above that taxed at 33 per cent. Recovering house prices is having an impact on that, increasing tax liabilities.

A canny way to disperse largesse, not to mention cash, might be to make use of the small-gift exemption, which allows a person gift up to €3,000 a year tax-free. “It might look small, but for a family of five it could be worth €30,000 each over 10 years, or €300,000 in total,” he says.

“If you have surplus cash in your account, some older generation members are saying what’s the point in growing my asset base, I’m only growing my tax issue, so why not start the investment in the name of the next generation?” Fahy says.

Setting up a family partnership doesn’t have the same negative tax connotations of a trust, allows you retain control of the asset, but the value accrues to the next generation. “It could be a house, or an investment portfolio,” Fahy suggests.

Taking out a Section 72 insurance policy may also be worth considering. “It’s a special life insurance policy whose proceeds, as long as it is used to pay CAT liabilities, are not taxable,” he says.

Whatever you do, “it’s important to establish your goals first, and then work towards them. Don’t let tax drive the bus,” Fahy advises.

International assets

Be careful around international assets. “It’s increasingly common for people to have acquired international assets, be they real property such as holiday homes overseas or investment assets,” says Maeve Corr, head of private clients at Crowe Ireland.

“They should consider putting a will in place in the country that they hold the asset and seek advice on the tax. Ireland only has two double tax treaties for estate taxes, being with the US and UK. Hence, while inter-spousal transfers are exempt in Ireland on death, this might not apply to all jurisdictions. It is important if you are creating a separate will it deals only with specified assets and does not revoke your Irish will.”

In addition, she has seen issues arising where people have accumulated shares through share-options schemes in US companies, commonly held in US broking accounts. “In this event, non-US citizens can only transfer $60,000 between spouses tax-free on death – again planning in advance can be a significant saver of tax. Tax on estate can be up to 40 per cent in the US. Certain funds are also deemed to be US assets and will trigger US estate taxes on death.”

The rules surrounding transfer of pensions vary depending on the type of pension and pre- and post-retirement. “We always recommend that clients include specific provision on the approved retirement funds in their will as to how it is to be transferred on death. For example, it may be transferred to an approved retirement fund for your spouse, with no tax implications. If children under 21 take the fund they are liable to inheritance tax at 33 per cent – the normal CAT thresholds apply – if over 21 it’s deemed to be income tax at 30 per cent,” she says.

Going for gold

Don’t forget gold. The old adage on Wall Street is that you keep a 10 per cent allocation of your portfolio in gold, and hope to God it isn’t performing because if it is, it means other markets have gone awry. It’s still seen as a safe haven and its performance during the recession bore that out.

At the time of writing, gold stands at €1,031 an ounce, so three one-ounce bars might make a nice tax-free gift a year to family members. Over time, it has been shown to outperform both equities and bonds too. Just don’t make the mistake of confusing gold jewellery and gold bullion as investment assets.

“When you buy jewellery, you typically pay a 300 per cent – or more – in mark-up, plus VAT,” said Mark O’Byrne, research director with Goldcore, an online gold and silver bullion trader. The real deal is better value, more liquid and holds its resale value better. On the down side, you can’t show it off.