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;
- Dwelling House Relief;
- Favourite Nephew/Niece relief;
- Relief for a Minor Child of a Deceased Child.
- Heritage Property & Heritage Property of Companies.
This is a relief from inheritance tax (CAT) for all gifts/inheritance of a relevant business property. he 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 relevant business property. (The 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.
- The property comprising of the gift/inheritance must be relevant business property at the date of the gift /inheritance.
- The relevant business property must have been owed by the disposer and his/her spouse/civil partner continuously throughout a minimum period prior to the date of the gift/inheritance . a) inheritance taken on the death of the disposer , 2 years immediately prior to the inheritance or b) otherwise 5 years ownership immediately prior to the date of the benefit. Ownership by spouse or civil partner deemed to be period of ownership of disponser.
What does “Relevant business property ” mean?
Property consisting 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.
This is a relief if applicable, can provide relief of up to 90% on gifts/inheritances of relevant agricultural property.
From the 20th November 2008 it applies to agricultural property situate within an EU member state. In relation to gifts/inheritance prior to the 20th 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.
- The property comprising of the gift/inheritance must be agricultural property at the date of the gift /inheritance.
- The beneficiary must be a ‘farmer’ at the valuation date (which in general means the date the property is valued).
What does “agricultural property” mean?
- Agricultural land, woodland situate in a EU member state after the 20th 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.
What does “a farmer “mean?
It is not the everyday definition of a farmer that applies here. In order to be able to benefit of obtaining 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.
|Agricultural Assets||Paddys Assets prior to inheritance|
|Farm||€1,000,000||House (after mortgage)||€20,000|
|Total Agricultural Inheritance||€1,175,000||Total Own Assets||€30,000|
Farmer Test = Total Agricultural Inheritance divided by Total Assets multiplied by 100. Paddy Barns Juniors percentage agricultural assets after the inheritance is 97.9%.
Paddy Barns is 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 inother agricultural property. Interesting there is no requirement for the beneficiary to farm the land just simply not to 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 Ineritance Tax (CAT) purposes and can benefit from the relief provided the criteria for obtaining the relief are complied with.
From the 8th 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.
Dwelling House Relief
This is a relief, from inheritance tax (CAT) that applies to a dwelling house regardless of the value of the dwelling house. A dwellinghouse is defined as a building or part of a building which is used as a dwelling. The dwelling house relief applies only to the part of the building used as a dwelling and includes grounds up to one acre. It also applied to an interest in a dwelling house ie a life interest. It is a full relief from inheritance tax, if the relief applies and conditions are complied with .The best way of showing you what a substantial relief this is, is to use an example.
For example: Sarah Murphy have been left the family home by her father under his will. The property is valaued at €475,000 and Sarahs father passed away on the 21th February 2013. Sarah has always resided at her family home.
|Value of house||€475,000|
|Relief of 100% applied||€475,000|
From the above example no inheritance tax applies and Sarah has the full benefit of her threshold of €225,000 for any other gift that she would receive under her fathers will. However, still using this example, Sarah three years previously bought an investment property with her sister . Sarah will now not be able to avail of the relief. Using the same value as above Sarahs inheritance tax is now calculated as follows:
|Tax Payable @33%||€82,500|
This example shows the importance of tax planning. Contact us today to discuss this matter in further detail.
In order to avail of the relief there are certain criteria that must be complied with:
- The beneficiary must have occupied the dwelling house as their only or main residence for a period of three years immediately prior to receiving the gift/inheritance. Very simply put you must be residing in the property three years prior as your main place of residence to benefit from the relief.
- The beneficiary must occupy and maintain the dwelling house as their main residence for six years after receiving the gift/inheritance. The relief will not be withdrawn where, the Beneficiary is over 55 years old, or if the beneficiary requires long term medical care in a hospital, nursing home, the proceeds of the sae are reinvested in another dwelling house provided the beneficiary occupies the original dwelling house and the eeplacement dwelling house for a period of 6 out of the 7 years starting on the date of the gift/inheritance.
- The beneficiary must not own another house or a share in another house on the date of the gift/ inheritance, otherwise the relief cannot apply. This includes foreign houses or an interest in a foreign property. After the transfer the beneficiary can own other dwelling houses but must occupy the dwelling house comprised in the gift/inheritance for the relevant period of time.
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 €225,000 whilst a nephew or niece suffers a more reduced threshold of €30,150.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 form inheritance tax for certain objects listed as “any pictures, prints, books, manuscripts, works of art, jewellery , scientific collection or other thigns 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 commisioners to be of national , scientific or artistic interest.
This exemption is subject to certain conditions:
- The objects the subject matter of the exemption being kept permanently in the state (except of temporary absences)
- 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 and is no substitute for specific advice that you would receive from us about Inheritance Tax. The law and tax law is always changing and affects each person differently.