Make cash gifts to reduce hit from inheritance tax
PW writes from Co Kilkenny: I am single and anxious to find out the best method to avoid my family paying inheritance tax on my estate. There are two brothers and their wives and seven nieces and nephews who will inherit everything.
The amount of capital acquisition tax (CAT) your family will pay on their inheritance depends on how much you leave to each of them. The tax-free threshold between Group 2 recipients — that is, brothers and sisters, nieces, nephews and other linear ancestors or descendents of the benefactor — is just €45,644 each. Anything over that amount is liable to 20% tax.
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If you leave all 11 relatives an equal share, collectively they can inherit €502,084 tax-free. If one of your relatives has been sharing your family home with you for at least three years, and does not own any property of their own, you could leave that person your house, tax free.
If the value of your estate exceeds €502,084 (and/or the value of your family home if it is being shared) you can take out a Section 60 life assurance policy. Although it requires substantial annual premiums, this will allow the proceeds of the policy to be paid as the CAT. You should speak to a good financial adviser about this and adjust your will accordingly.
Finally, you can also gift €3,000 to each of your relations tax free in any calendar year. This will reduce the value of your estate by €33,000 per annum and ultimately reduce their final CAT bill.
Dealing with Spanish move
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BMcM writes from Dublin: My parents, who are in their mid-seventies, have just sold their home and are moving to one they bought in Spain. They have about €200,000 left over and are looking at the best way to invest it for additional income to boost their pensions. Because of their ages I am worried about what may happen if they fall ill and need assistance. I am wondering if I should suggest they give me power of attorney before they leave.
A combination of deposit income and returns generated by dividend-bearing shares or investment funds may provide a return in excess of a gross deposit rate, but unless your parents are familiar with investing, they should hire an experienced, fee-based adviser to help them. They also need tax advice if they are to become Spanish residents (and perhaps re-write their wills to take into account Spanish inheritance tax laws).
If they are averse to investment risk, Northern Rock offers the best gross deposit rate of 3% at the moment. This will provide a €6,000 annual return before deposit interest retention tax, or €4,800 net, but they should also check out Spanish interest rates. Keep in mind that wherever they leave their cash, the capital sum will be eaten away by inflation.
Your parents would be wise to appoint you (or another trusted person) with a power of attorney if they have any financial interests here. They should also consider setting up an enduring power of attorney which only operates if they became mentally incapable of managing their own affairs (and supersedes an ordinary power of attorney at that point).
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This usually needs to be set up with a solicitor, but is worth the effort and expense as it allows the person appointing the attorney to set out the kind of personal care they would want should they become mentally incapacitated. It also means that the person would not become a ward of court.
Funding children through college
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JL writes from Cork: An acquaintance has said that it is possible to covenant money to your children. My two oldest are both going to college this year and judging by the small amount they managed to save this summer, they will be looking for pretty regular handouts from me (even though they will be living at home). Can you explain how covenants work?
I’m afraid you have been misinformed. Covenants are only available to people aged over 65, and only to a maximum of 5% of the covenantor’s total income and to a permanently incapacitated person. Perhaps the confusion arose because a parent can covenant their incapacitated child, though the tax relief on the covenant is only available if the child is over 18.
Funding college-aged children is an expensive proposition, which is why so many parents start savings or investment policies when their children are very young. Many parents will undoubtedly be using the proceeds of their SSIA accounts to fund higher education costs when they come on stream in 2006 and 2007, but until then one way to raise some cash, if your existing income or savings cannot do the job, is to do a short-term home equity release.
Irish Permanent, for example, offers a mortgage product that allows a minimum €3,000 drawdown, (in cheque form) and this is a good way to supplement your children’s college finances since the interest rate is so low. Your mortgage payment will rise only slightly but ideally you should reach an agreement with your children that they repay all or part of the sum you draw down once they start working.
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CORRECTION: Following a recent response to a reader in relation to the rent-a-room scheme it should be pointed out that so long as income from this source is kept at or below the €7,620 threshold, no tax is payable on these earnings. If earnings go above this amount the tax-free status no longer applies.
Jill Kerby is co-author of the 2004 TAB Guide on Money, Pensions and Tax. E-mail her at money.ireland@sunday-times.ie or write c/o Money Matters, The Sunday Times, Fourth Floor, Bishop’s Square, Redmond’s Hill, Dublin 2, giving a daytime telephone number. We cannot send personal replies or deal with every letter. Please do not send original documents or SAEs. Information and advice is offered without legal responsibility.