James Bond (or at least the actor who plays him) might find the concept of inheritance "distasteful" but, for most people, leaving something to those you care most about – and being a beneficiary of this good fortune – is a good thing.
Earlier this month Daniel Craig, the actor in the latest incarnation of 007, said his philosophy on wealth is to "get rid of it or give it away before you go". Easy, perhaps, for someone with multimillion fortune to proclaim; but the fall-out caused by inheritance is an issue that affects many Irish families.
For some then, opting to deal with any wealth in the family before their death may be a solution to any ugliness that might arise thereafter. But does it make sense to do so?
Looking after yourself first
In general, giving away your wealth while you are still living a la Daniel Craig does not appear to be a very Irish trait.
"I haven't really come across people actively trying to get rid of their assets," says Brian Duffy, tax partner with William Fry. Marie Bradley, managing director of Bradley Tax Consulting, agrees. "It happens very rarely," she says.
But for those considering it, the first consideration perhaps, should be to ensure you don’t give away too much.
“One of the key things is they retain enough for themselves to ensure they can fund enough for themselves; it’s always a bit of a juggling act,” says Bradley, adding, “It’s important that parents don’t find themselves in situations where they’re reliant on the goodwill of their children.”
The type of asset retained is also a consideration; holding on to a liquid asset such as cash may be necessary to fund future care in a nursing home or at home, for example.
“It’s a balancing act – how much assets do I have, what can I afford to give during my lifetime?” says Bradley of the questions that should be asked.
And it’s not just about whether you can afford to give it away.
Bradley says people should ask themselves: “Is it appropriate?” Do I want to make a transfer to my children?” After all, there may be pressure to transfer assets earlier than you might have wanted to.
There is also “most definitely” more of a sense of entitlement in terms of what children may expect to receive says Bradley, noting that some children of wealthy parents don’t end up making as much money themselves, and, used to the best of everything, look to their parents to keep providing this.
“Old habits die hard, and parents can come under pressure,” she says.
Tax efficiency
When you die, assets will also have an impact on the eventual tax bill. In general, there are more taxes to be paid should you wish to pass on assets within your lifetime.
This is because, with a lifetime transfer, capital gains tax (CGT) at 33 per cent, gift or capital acquisitions tax (CAT), also at 33 per cent, and stamp duty need to be addressed. Stamp duties range from 1 per cent on shares, to 1-2 per cent on property, and to 7.5 per cent on other assets, which can end up a significant sum, although some relief on stamp duty may apply in a farming context.
In the event of a death, on the other hand, neither stamp duty nor CGT will apply.
“There are more taxes if you make a gift rather than leaving it [until death],” says Duffy.
However, the difference may not be as great as one might expect. “I would say to clients [that] it’s important you do the number crunching under each scenario,” says Bradley.
People can feel that 'This is my business, built up through my sweat and tears, and the last thing I want is for someone to squander it'
Consider a property bought in Ireland as a holiday home some 15 years ago. The parents have a taxable gain on the property of €500,000 on the difference between the €100,000 they paid for it and the market value today of €600,000. Ignoring their annual small gains exemption (of €1,270), gifting this to a child would give rise to a CGT bill of €165,000 to be paid by the parents.
And if CAT tax-free thresholds don’t apply – because the child has already received €335,000 in gifts from the parents over their lifetime – a bill of €196,020 will be due based on gift tax at 33 per cent after taking into account both annual small gift exemptions, to be paid by the child.
Even where no previous gifts have been received by the child, this property – valued at €600,000 – would exceed their tax-free gift/inheritance allowance by €265,000, creating a tax charge of €77,550.
However, it may be possible to offset CGT against CAT, so that in the end, the overall tax bill is reduced or totally written off.
According to Duffy, with the transfer of a property (or shares) in a situation that attracts both CGT and CAT, a credit for a capital gains tax paid is applied against the CAT due.
So, in practice then, rather than a total tax bill of €361,020 on a gift of a property worth €600,000, in the example above, the bill would fall to €196,020. Of this, the parents still pay their €165,000 CGT but the CAT bill to the child falls to €31,020.
The child must hold the property for at least two years; if they dispose of it before two years have elapsed the relief ceases to apply, and the full amount of CAT must be paid.
In addition, a gift of a house will also give rise to stamp duty at 1 per cent up to a value of €1 million, and 2 per cent on the excess over this. So, the house in the example above would have a stamp duty bill of €6,000, bringing the total taxes owed on the transaction up to €202,020.
If the house was not received by the child until inheritance after the death of the parent, the tax payable would be 2 per cent less, at €198,000 (ie €600,000 x 33 per cent).
In addition to the difference in tax, transferring an asset during a lifetime also means the parents must ensure they have sufficient liquid assets to meet any tax bill due.
Business assets
When it comes to business assets however, more reliefs are available, such as retirement relief or agricultural relief, for lifetime transfers.
But it may be only tax efficient to transfer up to a certain age. According to Bradley, business owners should take advice before their 55th birthday, as different rules apply from the ages of 55-65 and thereafter.
In some cases, if you miss the planning opportunity during these years, it may be more efficient to wait until death to pass assets.
“It’s really important people with business assets take advice at various stages of their business career,” she says.
Other factors
Of course, tax is not the only factor in a decision to transfer assets during your lifetime.
“Tax is not necessarily a huge driver; people make these decisions based on how they feel,” says Duffy.
“It’s also down to family dynamics and affordability,” agrees Bradley, noting that some families may not feel ready to pass wealth on to the children, depending on the stage of life they are at.
And when it comes to businesses, it can be a very personal decision as to when to hand over controlling interest. There can be a tension about whether children are ready, and also the issue of division of assets between children involved in the business and those who are not.
While some business owners won’t be too bothered about the timing of a transfer, others will be. “People can feel that ‘This is my business, built up through my sweat and tears, and the last thing I want is for someone to squander it,’ ” he says.
Test the waters
One way of testing the waters, notes Duffy, is to gift €3,000 each year under the small gifts exemption.
This exemption means that a gift worth as much as €30,000 (for a daughter, son-in-law and their three children from each parent/grandparent) can be given tax-free each year.
I would see situations where parents have drafted a will, and given a copy to every member of the family
Depending on a family’s means, this gift may be more than sufficient; for others it may be a way of understanding their children’s approach to money and a way of starting a path of a lifetime disposal of their wealth.
However, it is important to remember that the gift to the grandchildren cannot be for the ultimate use of the parents or it will fall outside the exemption.
Even if a parent doesn’t wish to transfer any wealth during their lifetime, being transparent about their eventual plans can help. “I would see situations where parents have drafted a will, and given a copy to every member of the family,” says Bradley. “Then there’s no surprise – it’s all out there.”
Charitable donations
Giving money away during your lifetime may also involve giving it to worthy causes outside your own family. However, while a business may be entitled to tax relief on a charitable donation, an individual isn't.
Instead, when an individual makes a charitable donation of €250-€1 million, the charity is entitled to tax relief, of up to 31 per cent, on this donation. And this is true in life, as upon death.
It's also possible to make a donation of a heritage item to the State, which is subject to tax relief. It doesn't happen very often but a tax credit of 80 per cent of the market value of the item does apply in such instances.
Back in 2016 for example, WB Yeats's Nobel Prize medal, valued at €1.5 million, was donated to the State, as was Head of a Bearded Man by Peter Paul Rubens, which was valued at €3.5 million.
