As if the taxation system wasn’t cruel enough, there are times where it can seem to conspire against your best intentions and you get taxed on the double.
ne of these is Capital Acquisition Tax (CAT), a punishment on your generosity. Earnings, already taxed, are gifted or bequeathed and hey ho, tax is applied for a second time.
How does it work, and crucially, how can you minimise or avoid it altogether? That’s what I’m looking at this week.
What is CAT?
CAT is a tax on gifts whether given in life, or from beyond the grave.
It’s a form of wealth tax, cumulative and aggregate but non-progressive, in that it’s a flat charge (33pc), but disproportionately affects those with higher valued properties and smaller families. It is charged when you pass along your assets as gifts or inheritances to family or friends.
There’s a fair bit of extra money sloshing about in savings accounts due to Covid, and much of it belongs to the older generation; amassed pension pots, safe deposits and of course, wealth tied up in family homes, seven in ten of which are under-occupied, according to Eurostat.
Older people can be put under pressure to ‘release’ their assets, pass along cash in life rather than waiting until after death; children needing house deposits, grand-children’s expensive schooling, and larger suburban homes owned by retirees, children long flown the nest, coming under pressure from younger wannabe buyers.
In tax terms there is no difference between money or assets given as a gift or as a bequest. Gift tax and Inheritance tax are the same thing, under the umbrella of CAT. Additionally, there is no preference given to money over land, property or even your granny’s jewellery. It’s all lumped together and added up.
There’s no gain is giving away wealth in life rather than in a will or vice versa. It’s entirely your choice but nobody should feel pressured to make that decision and legal advice is never a bad idea.
CAT is paid by the person receiving the asset (disponee), not the person leaving it (disponer), so in that sense it’s not your problem who you leave your assets to. There is no legal obligation to leave anything to your children, in fact.
Tax Free Thresholds
You are permitted to receive certain amounts of assets tax free, depending on your relationship to the person giving it to you.
The ultimate threshold is that of spouse. A married couple can transfer the entirety of their assets to each other completely tax free. An unmarried couple (however long together) cannot and will be severely hammered with a large tax bill if they attempt to do the same thing (see the panel for a worked example).
A child (natural, adopted or in some cases fostered), can receive up to €335,000 from a parent, from all sources, tax free as Group A recipients. Also included here are grandchildren where their parent (your son/daughter) has died.
A close relative (sibling, niece/nephew, grandchild or what’s quaintly termed a ‘linear descendant’) can receive up to €32,500 without it being taxable as Group B.
The final class of recipient (Group C) is everyone outside these categories – friend, neighbour, (unrelated) god-children, who can receive up to €16,250 before tax is paid.
CAT is cumulative throughout life for all gifts and inheritances received after 1991. This means they are added up and the lot taxed accordingly. So, you could hit your ‘limit’ after just one inheritance.
It means you could seek to avoid as much CAT as possible to your disponees by spreading out your generosity across as many classes and individuals as you can.
If you leave everything to one person, it’s more likely they will incur a bill, perhaps having to sell the very asset you are leaving in order to pay it. This is why only children end up paying disproportionately. For an estate worth €1m, a single child will pay €219,450 in tax; three siblings pay nothing at all if divided evenly.
In addition, CAT is ‘aggregated’. What this means, according to financial advisor John Lowe, is, “In the case of say, nieces or nephews who may receive bequests from a number of uncles and aunts, aggregates apply, so if you receive your full threshold from one uncle, the next aunt or uncle inheritance received will attract CAT tax at 33pc”.
There is a ‘small gifts’ exemption of €3,000 per year; an extremely valuable tool in gift tax planning. Anyone can gift this amount to another person each year without them incurring a tax bill. It is not counted toward inheritance or aggregation. At its best, each parent could gift €3,000 to each child (€6,000) each year, and it is ignored for tax purposes. Then, on death, the children could still receive their entire inheritance within the Group A threshold. For generous parents and grandparents out there it’s a great way of minimising a later tax bill, while also getting all the gratitude while you’re still alive!
An estate worth €1m is left by a man, after he dies, to his life partner. It’s treated very differently depending on their marital circumstances:
Married: transfer of entire estate with no tax bill arising.
Unmarried: If he owned all of the assets, she is only entitled to inherit as a Group C disponee, with a tax-free threshold of €16,250, leaving a chargeable gain of €983,750. Capital Acquisitions Tax, or CAT, (33pc) means a tax bill of €324,637.
A Section 72 policy can be effected between unmarried couples to mitigate against CAT, says Mike Knightson of KM Financial.
“It’s recognised by Revenue to pay an amount of inheritance tax without the sum assured itself being treated as a gift,” he said.
“It ensures that the plan proceeds are used only, in the first instance, to pay Inheritance Tax. Any surplus may revert to next of kin. As the proceeds are paid immediately on death to the nominated trustee, they don’t go into the estate.”
The cost of the policy, which is effected on a Life of Another basis under trust, depends on age, value and health circumstances.
“It means they can pass on their assets in the way they wish – and plan for the tax consequences,” added Mr Knightson.
However, he adds it is vital for unmarried partners to get good tax advice when they are making a will to avoid unknowingly creating a bill for their loved one after they pass away.