Passing on your inheritance and your place of residence – the tax minefield

Frequently Asked Business Question:

I was born in Belfast and now live in Dublin. I have 2 children who both live in Dublin and I am contemplating retiring to Northern Ireland. Is there a difference between the Inheritance tax systems in the UK and Ireland?

Top Tip:

There is a very significant difference in the way Inheritance Tax operates in the UK and Ireland. In the UK the deceased’s estate is the taxable entity whereas in Ireland the beneficiary of a gift or inheritance is the taxable entity. Ireland operates a tax called Capital Acquisitions Tax (CAT) on all gifts and inheritances. CAT is levied at 33% on the amount over the tax free threshold (TFT). The TFT varies depending on the relationship between the donor and donee and is currently €310k between parents and each child. This is a lifetime limit so all gifts and inheritances to each child are aggregated to see if CAT is due.

The UK has no concept of CAT and gifts can be made to children without any liability to Inheritance Tax (IHT) provided the donor survives the gift by 7 years. Death within 7 years may result in IHT chargeable at 40% depending on the overall value of the deceased estate. At present in the UK IHT is charged at 40% on the excess of the estate over the £325k nil rate band (NRB) and importantly spouses can used their deceased spouses NRB meaning that the first £650k of the estate of the surviving spouse is not charged to IHT. Furthermore the UK is introducing on a gradual basis a ‘Main residence NRB’ which will amount to £175k per spouse when fully implemented which will also be transferrable between spouses. When an estate exceeds £2m this RNRB will be reduced. Taking all of this into account means that a UK couple have a tax free threshold of £1m on second death – transfers between Husband and wife are exempt from IHT and indeed CAT in Ireland.

Generally speaking, the UK has a much more generous tax regime for estates than Ireland. In addition there are valuable reliefs such as Business Property relief that operate much more in the taxpayers favour in UK than Ireland and which can extend to passive investments in UK unlike Ireland. The ability to make unlimited gifts provided they are survived by 7 years is also a major benefit to UK taxpayers.

IHT and CAT are very complex taxes especially in a cross border context and specialist advice is essential. A significant number of Northern Ireland residents own holiday property in border counties such as Donegal and don’t realise that even though they and their children reside in UK, if they transfer the property to their children in lifetime or on death both UK and Irish Capital Gains tax needs to be considered as does CAT and IHT. There is generally double tax relief available however with Irish CGT at 33% and UK CGT ranging from 10% to 28%, quite often a lot of the Irish tax is unrecoverable as it exceeds the UK liability.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.