Inheritance Tax Reliefs

There are a number of inheritance tax reliefs available. It is important to have an understanding of the tax reliefs available so that when you are drafting your will you can ensure that certain reliefs can be availed of.

The following are a list of some of the tax reliefs available:

• Business Relief
• Agricultural Relief
• Favourite Nephew/Niece Relief
• Relief for a Minor Child of a Deceased Child.
• Heritage Property & Heritage Property of Companies.

Business Relief

This is a relief from Inheritance Tax (CAT) for all gifts/inheritance in respect of a relevant business property.

The relief is not a full relief from inheritance tax. It is a deduction of 90% from the market value of the relevant business property.  In other words, a beneficiary can reduce the value of the relevant gift/inheritance of business property by 90% of its value for the purposes of calculating inheritance tax.

For a beneficiary to qualify for this relief certain criteria need to be complied with:

1. The property comprising of the gift/inheritance must be a relevant business property as at the date of the gift/inheritance.
2. The relevant business property must have been owned by the disposer and his/her spouse/civil partner continuously throughout a minimum period prior to the date of the gift/inheritance

1. What does “Relevant Business Property ” mean?

Relevant Business Property consists of a business or an interest in business. A farm where agricultural relief doesn’t apply could avail of business relief if conditions for the relief are complied with. The Finance Act 2001 extended the scope of relevant business property to unquote shares in a company whether incorporated in the State or otherwise.

Unquoted shares or securities of a company carrying on a business provided certain conditions are complied with by the beneficiary.

Lands, buildings machinery owned by disposer used for the purpose of the business carried on by the company.

From this definition you can see that the relief applies to the business, so leaving a gift you a Will of a premises ie a warehouse without the business will mean that the relief will not apply.

Not all business will qualify as a relevant business property. Where the business or the business of the company consists wholly in mainly of dealing in currencies, securities, stocks, shares, land or building or making or holding investments, then the relief will not apply. The revenue gives guidance as to the term mainly as meaning more than 50% and that the position would be looked at over a period of time as such assets would fluctuate in value.

Business relief will be clawed back where the relevant business property or a part thereof ceases to qualify as a relevant business property or is sold , redeemed or compulsorily required. No claw back will arise where the relevant business property is replaced by other relevant business property within the 12 months unless the market value of the original property that availed of the relief is greater that the replacement property, that the claw back would be proportionally claw back.

2. Relevant Period

The person making the gift or inheritance must have owned the relevant business property for a period of at least:

• five years for a gift
• two years for an inheritance

The minimum ownership requirement can be partially met if that property was owned by either the person’s spouse or civil partner.

Agricultural Relief

Agricultural Relief can provide relief of up to 90% on gifts/inheritances of relevant agricultural property.

From the 20^th November 2008, it applies to agricultural property situate within an EU member state.

In relation to gifts/inheritance prior to the 20^th November 2008 it only applies to agricultural property in Ireland. The relief is not a full relief from inheritance tax. It is in the form of a deduction of 90% from the market value of the agricultural property.  (The beneficiary can reduce the value of the relevant gift/inheritance of agricultural property by 90% of its value for the purposes of calculating inheritance tax).

For a beneficiary to qualify for this relief certain criteria need to be complied with.

1. The property comprising of the gift/inheritance must be agricultural property at the date of the gift /inheritance.
2. The beneficiary must be a ‘farmer’ at the valuation date (which in general  means the date the property is valued).

1. What does “Agricultural Property” mean?

• Agricultural land, woodland situate in a  EU member state after the 20^th November 2012.
• Farm house, but note that a farm house by itself without the land, is not agricultural property.
• Farm buildings, farm houses and farm machinery
• Livestock and bloodstock on the land but note that a gift/inheritance of Livestock and bloodstock by itself without the land, is not agricultural property.
• Woodland, crops, trees NB must be growing on the land
• Payment entitlements-single farm payment entitlements.

2. What does “a Farmer” mean?

It is not the everyday definition of a farmer that applies here. In order to be able to benefit from the relief, a farmer is a person who can show that not less than 80% of their assets, after receiving a gift, comprises of agricultural property. It is a relief that doesn’t automatically apply, it must be claimed and demonstrated to the Revenue Commissioners that the individual passes the “Farmer” test.

The best way to show this is to give an example.

Paddy Barns Junior receives an inheritance from his father of a farm worth €1,000,000, machinery worth €100,000 , livestock worth €75,000 and entitlement €25,000. Paddy Barns Junior bought a house two years pior in the Dublin as an investment worth €300,000 which has a mortgage worth €280,000, and he has a car worth €10,000.

Farmer Test = Total Agricultural Inheritance ÷ by Total Combined Assets x by 100.

Paddy’s percentage agricultural assets after the inheritance is 97.5%.

Paddy Barns is considered a “Farmer” for the purpose of the relief.

The relief granted can be clawed back or partially clawed back – e.g. if the agricultural property is sold within six years from the date of the gift/inheritance.

If it is sold, the entire proceeds of the sale must be invested in other agricultural property. Interestingly, there is no requirement for the beneficiary to farm the land just simply to not dispose of it.  The claw back doesn’t apply to the disposal of crops, or farm animals.

Single Farm Payment
It is extremely important that if you have a Single Farm Payment entitlement that it is dealt with in your Will.

Since the start of 2005 you can transfer/sell your Single Farm Payment entitlement with or without the land. If you do not deal with the Single Farm Payment in your Will it will fall to the residue of your estate. If you have no residuary clause it will be dealt with under the Rules of Intestacy.

Single Farm Payments are treated as agricultural property for Inheritance Tax (CAT) purposes and can benefit from the relief provided the criteria for obtaining the relief is complied with.

Note: from the 8^th February 2012 the beneficiary is no longer required to remain resident in the State for the three years immediately following the year in with the valuation date falls to retain the benefit of the relief.

Favourite Niece/Nephew Relief

Favourite Nephew/Niece Relief is a substantial relief that a nephew/niece can be treated as if they were a child of the individual for inheritance tax purposes. In order to claim this relief, the niece or nephew has to have worked substantially on a full-time basis on the farm for their aunt/uncle for a period of at least 5 years prior to the date of the gift/inheritance. “Substantially on a full time basis” generally means at least 24 hours a week but if all the farm work carried out just by the farmer, his spouse and the nephew/niece, then 15 hours a week would be sufficient.

A comparison of the current thresholds is the best way to demonstrate how effective this relief. The current threshold for a child is €335,000 whilst a nephew or niece suffers a more reduced threshold of €32,500.The difference is substantial and again highlights the importance of estate planning. .

There are conditions attached to the relief. In order to qualify for the relief, the nephew or niece must have worked on a full-time basis in the business/farm for a minimum period of five years prior to taking over the interest in the business/farm. This would require 15 hours per week where the business is small and 24 hours per week where the business/farm is large. Favourite niece/nephew relief has been extended so that it is available to the child of a civil partner’s brother or sister.

Heritage Property & Heritage Property of Companies

There are exemptions from inheritance tax for certain objects listed as “any pictures, prints, books, manuscripts, works of art, jewellery , scientific collection or other things not held for the purposes of trading”. It also applies to a house or garden situate in the state where it is established to the satisfaction of the Revenue Commissioners to be of national , scientific or artistic interest.

This exemption is subject to certain conditions:

1. The objects the subject matter of the exemption being kept permanently in the state (except of temporary absences)
2. Reasonable viewing facilities are allowed to members of the public or recognised bodies.

There is a claw back if the heritage property is sold within  6 years after the valuation date, but the Finance Act 2012 sets out a list of bodies to which property may be sold without triggering the claw back.

The information set out above is to act as a guide only and is no substitute for specific advice.

If you would like to discuss your individual situation, please Contact Us.