76

Inheritance Tax Planning and Compliance Requirements 2014

Inheritance Tax
Planning and Compliance
Requirements 2014
Mark Barrett Tax Partner, Ronan Daly Jermyn

Introduction

of millionaire households has not decreased and has most likely

In June 2012 the Boston Consulting Group and Bloomberg

increased in line with the return to growth in our economy.

compiled a report (Global Wealth 2012: The Battle to Regain

Strength) that placed Ireland 14th in a global list of countries with
the most millionaires per capita, which was the second-highest
place for any EU country. According to the data, despite economic
carnage and an unemployment rate that remained above 14%,
approximately 33,000 Irish households ranked as millionaire
households. It is reasonable to assume that in the period of
just over two years since that report was compiled, the number

This wealth may have been accumulated from years of hard work
and astute financial planning or, in some situations, the luck of a
timely land disposal or exit from a business. Irrespective of how it
was generated, the changes to the capital acquisitions tax (CAT)
regime that have been introduced since 2009 have made it more
difficult to preserve this wealth when it forms part of a deceaseds
estate. At the beginning of 2009, a family of four children could
inherit an estate of 2m between them without giving rise to an

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Inheritance TaxPlanning and Compliance Requirements 2014 

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inheritance tax liability. The same estate today could result in an

Valuation Date

inheritance tax liability of 363,000. The changes that have had

Determining the valuation date of an inheritance is one of the most

the greatest impact are:

difficult aspects of CAT to advise on. It is also one of the most

the phased reduction in the parent/child exempt threshold

from 542,544 in 2009 to the current level of 225,000, with
corresponding reductions to the other group thresholds; and
the gradual increase in the CAT rate from 20% in 2008 to the
33% rate now in force.

important issues, as it is the date on which the property will be

valued, and the pay and file date is also determined by reference
to it. The Capital Acquisitions Tax Consolidation Act 2003 (CATCA
2003) s30(4) defines the valuation date of an inheritance as the
earliest of:
the date on which the inheritance can be retained for the ben-

While succession planning is often well down the list of priorities

for wealthy individuals or families, I have found in recent years
that the scale of the potential tax liabilities that could arise on
death has brought a renewed focus on planning to mitigate those
liabilities and to plan for the payment of any tax that does arise.
The aim of this article is to highlight some practical considerations

efit of the beneficiary,

the date on which the inheritance is actually retained for the
benefit of the beneficiary and
the date on which the inheritance is transferred or paid over
to the beneficiary.

in inheritance tax planning, which are based on my own experi-

In practice, the date of grant of probate is generally taken as the

ences of advising clients in recent years and reflect the changed

valuation date; however, there are several situations where an

legislative and economic landscape that we find ourselves in.

earlier or later date can arise. In any one estate, there can be

Pay and File Date

It is timely to remind practitioners

It is timely to remind practitioners that all

that all gifts or inheritances with

gifts or inheritances with a valuation date on

a valuation date on or after 14

or after 14 June 2010 have a fixed CAT pay

and file date. CAT on all gifts and inherit-

June 2010 have a fixed CAT pay

ances with a valuation date in the 12-month

and file date. CAT on all gifts and

period ending on 31 August in a particular

year must be paid and filed by 31 October

inheritances with a valuation date

several different valuation dates for

different bequests. For example, if
cash is distributed by the executors
before the date of grant, the
valuation date would be the date
of the distribution. If the residue is
not ascertained at the date of grant
(for example, due to a claim on the
estate), the valuation date for the

of that year. This replaced the previous

in the 12-month period ending

residue would be later than the date

regime, whereby a CAT return had to be filed

on 31 August in a particular

of grant.

valuation date. I mention this filing deadline

year must be paid and filed by

There can be significant tax conse-

at the outset because in my experience the

31 October of that year. This

fluctuate between the date of death

and the tax paid within four months of the

awareness of it is not as extensive as that of

quences where values of assets

and the date of grant of probate. For

the income tax filing deadline.

replaced the previous regime,

There can be a very short timeframe

whereby a CAT return had to be

between a valuation date arising in, say,

filed and the tax paid within four

over 25% on the previous 12-month

late August and a payment date for CAT of

months of the valuation date.

period, and the value of residential

31 October. Where the valuation date is the

example, at times so far during 2014,

the ISEQ index of shares was up

property has grown by double digits

date of grant of probate, it may not be possible for the executors

in some areas. An estate with a share portfolio valued at, say, 1m

to generate sufficient cash from an illiquid estate in a two-month

at a date of death in 2013 could have been worth 1.3m by the

period. Care should therefore be taken, where possible, to plan

date of grant of probate in 2014, resulting in a potential additional

the steps that will need to be followed once probate is granted.

inheritance tax liability of 99,000 (300,000 x 33%).

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Inheritance TaxPlanning and Compliance Requirements 2014

Great care should be taken in considering the valuation date. The

wealthy individual to do the maths and let their client make an

facts should be fully explored to establish the types of assets

informed decision on the potential use of a discretionary trust.

involved, the nature of the bequest, the date of retention by the

executors, the solvency of the estate and whether any legal or

Section 72 Insurance Policies

financial claims exist against the estate. In the above example,

A Section 72 policy is an insurance policy that complies with the

if the valuation date could be justified as a date earlier than the

criteria set out in s72 CATCA 2003, the primary conditions being

date of grant of probate, the associated tax savings could be

that the policy is expressly effected for the purpose of paying

substantial.

relevant tax and in respect of which annual premiums are paid.

The benefit of such a policy is that the proceeds are exempt from

Discretionary Trusts

inheritance tax to the extent that they are used to discharge

The use of discretionary trusts as a tax-planning tool is based on

inheritance tax. With a current tax rate of 33%, this can represent

a simple philosophy: tax deferred is tax saved. A discretionary

a significant saving.

trust allows for CAT to be deferred until the assets within the trust
are distributed to the beneficiaries. To counteract the retention
of property within a trust and prevent it growing without the
imposition of a CAT charge, once-off (6%) and annual (1%) discretionary trust taxes apply.

In the early 1990s the top rate of inheritance tax was 40% and
the exempt threshold for parent/child benefits was 150,000
index-linked; therefore it was almost a financial necessity for
many families to have a s72 policy in place. As the CAT regime
became more benign, the popularity of these

In the period from December 1999 to

I find that where

s72 policies waned to the extent that very

November 2008, when the rate of inheritance

individuals have funds,

few clients could see the merits in them. This

tax was 20%, I would generally have advised

clients to use discretionary trusts as part of

say, on deposit, which

will planning only where the property within

could be subject to 33%

the trust would be distributed before the

position has now come full circle.

I find that clients have very polarised views on
the attractions of these policies. Some take

21st birthday of the youngest primary object

tax on their death, they

of the trust or where the trust was for the

see the attraction of

benefit of an incapacitated individual. In these

taking out a policy with a

required to spend their after-tax income to fund

discretionary trust tax of 6% nor the annual

predetermined value on

insurance premiums. Others take the view,

1% charge would apply. Where the discre-

death, which then does

circumstances, neither the initial charge to

tionary trust taxes applied, after a period of,

say, 12 years, these taxes would be nearly as

not attract tax if used to

much as the inheritance tax liability that was

pay inheritance tax.

being deferred.

the view that it is for the beneficiaries to take

care of their own taxes out of their inheritances
and that the individuals should not also be

in particular where estates do not comprise

liquid assets, that the funding of tax out of the
estate could require the sale of property, which
could lead to difficulties in paying tax on time.
It might also result in the sale of assets that
have been in the family for generations. I find

However, in view of the current inheritance tax rate, serious

that where individuals have funds, say, on deposit, which could be

consideration should be given to establishing a discretionary trust

subject to 33% tax on their death, they see the attraction of taking

in a will, paying the initial and annual discretionary trust taxes, and

out a policy with a predetermined value on death, which then does

thereby deferring a potential 33% inheritance tax liability. I find

not attract tax if used to pay inheritance tax. In essence, they are

that the decision to use trusts is made by experienced investors

swapping a taxable asset for a non-taxable one.

who understand the concept of trusts, are comfortable with the

investment decision-making of their trustees and believe that it is
possible to preserve more wealth by investing 94% of their assets
and suffering an annual 1% levy, rather than losing up to 33% of
their estate at the outset. I would encourage anyone advising a

It can pay to be creative in funding the premiums for the policies:

for example, through the disposal of property to companies
(perhaps at a capital loss) or the disposal of a primary residence
when trading down (and availing of principal private residence

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Inheritance TaxPlanning and Compliance Requirements 2014 

79

(PPR) relief ). An alternative is to use the annual exemption of

means of extracting these from a company. These could include

3,000 per individual to provide funds to beneficiaries to take out

using them for pension funding; financing a share buy-back, if it

their own policies for the payment of tax on expected inheritances.

can be implemented efficiently in compliance with legal and tax

requirements; and executing a shareforundertaking transaction,

Business Relief

whereby the cash/investments remain with the existing company

This important relief has the effect of

reducing the value of qualifying business
property by 90% for CAT purposes. Where
shares in companies are involved, it is

etc. While, on the face of it, this may result

In conclusion, I would
sound a note of caution

only in wealth being redistributed between the

different asset classes of an individual, it has the
practical advantage of maximising the business

necessary to establish the percentage value

for practitioners to assess

relief available and minimising the tax payable

of the shares that is derived from business

fully the previous benefits

by a beneficiary whose benefit consists of shares

assets and non-business assets, with relief

applying only to the business asset element.

received by a beneficiary.

I have come across many instances where

in a family company, and not the cash to pay the

tax on the benefit (which may be locked up in
the company).

substantial cash reserves and investments have accumulated

within companies in the last five to six years, as directors/share-

Prior Benefits and Free Use of Property

holders have decided to retain profits within companies both for

In conclusion, I would sound a note of caution for practitioners to

prudent commercial reasons and to avoid the increased level of

assess fully the previous benefits received by a beneficiary. The

income tax/levies that could apply on salary or dividends.

economic downturn resulted in many situations where parents

Business relief should apply to cash that is held within companies

for working-capital purposes or to meet short-term business
liabilities. However, where accumulated cash might be considered
excess cash, it will be necessary to satisfy Revenue that it
qualifies as a business asset. For example, it could be argued
that the cash is held for regulatory purposes or for the funding of
future acquisitions or business premises or that it is retained as a
precautionary balance of reasonable amount.

provided financial assistance to their children, in terms of both

cash and the free use of property. While the annual exemption
of 3,000 per individual may shelter part of such benefits, any
excess must be aggregated when calculating CAT liabilities. It
is easy to overlook such benefits, which can accumulate to a
significant amount over a period of years and should be examined
and highlighted to any beneficiary.
Read more on

The Taxation of Gifts and Inheritances

Where a company holds cash or investments that do not qualify

for business relief, it may be worthwhile considering various

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