Inheritance Tax Considerations for Irish Expats in Asia

Estate planning and Inheritance tax while quite frequently discussed in the UK Financial press, is far less prominent and talked about in Ireland. It is however an important consideration for Irish expats, mainly because for many Irish expats they are likely to have family ties back in Ireland. And, the rules for Inheritances dictate that if either the disponer (the person leaving you an inheritance) or the beneficiary of the inheritance are tax resident in Ireland, the inheritance will be subject to Capital Acquisitions Tax in the Republic of Ireland.

What is Capital Acquisitions Tax?

Inheritance tax in the Republic of Ireland is called Capital Acquisitions Tax or CAT. It differs from the UK, in that it is a tax on the beneficiary rather than on the estate of the deceased person and is charged on the taxable value of the inheritance.

CAT applies to all property located in Ireland but also to properties that are not located in Ireland if either the person giving the benefit or the person receiving it are resident or ordinarily resident in Ireland for tax purposes. Again, this is significant as it is different to the UK system which is based on domicile rather than residency.

The difference between residency and domicile

It’s important to understand the difference between residency, which is based on how many days you spend in a country in any given tax year, and domicile, which is the country that would be considered your natural home. You may currently live and be tax resident in China but your domicile could still be Ireland.

Domicile is a concept of general law and it is a much more permanent concept than residence.

Everyone has a ‘domicile of origin’ at birth (usually the domicile of the father). You keep your domicile of origin throughout your life, unless you choose to acquire a new domicile of choice.

Tax-free thresholds for Capital Acquisition Tax (CAT) in Ireland

Inheritors fall into three groups depending on their relationship to the person who has left the inheritance and this determines the tax-free threshold in relation to CAT. These are as follows:

Group A

A son or daughter of the person giving the gift or inheritance (the disponer). In the most recent budget the Irish government increased the threshold for this category to €335,000. This is quite a shrewd move on their part as believe it or not this group does not generate the lion’s share of revenue, of the three groups.

Group B

A parent, brother, sister, niece, nephew, grandparent, grandchild, lineal ancestor or a lineal descendant of the disponer. The threshold for this group is €32,500.

Group C

Anyone who does not fall into groups A or B is in group C and subject to an allotted threshold of €16,250.

What is the Capital Acquisition Tax rate?

The CAT tax rate is exactly the same as capital gains tax and charged at 33%. Given the above thresholds, the tax bill will vary greatly depending on the beneficiary’s relation to the deceased.

Significantly, anyone whether they fall into group A, B or C, who has received gifts and inheritances since December 1991 totaling more than 80% of the tax-free threshold for their relevant group must submit a tax return.

The threshold in each relationship category is a lifetime amount on inheritances from December 1991 forward. Any value above that is taxed at 33%.

For example, a child who receives a €100,000 inheritance from one parent in one year and a €300,000 inheritance from the other a few years later would owe tax of 33% on €65,000, the excess beyond the total inheritance of €335,000.

Are there any Capital Acquisition Tax exemptions?

There are and these are as follows:

  • Any inheritance or gifts made between spouses
  • The first €3,000 of all gifts received from a benefactor in any calendar year
  • Irish Government stock given to a non-Irish domiciled beneficiary, as long as it had been held by the beneficiary for at least 6 years previously
  • Any inheritance received from a deceased child which had been given to the child as a gift by the parent

What are the different kinds of relief that apply to Capital Acquisition Tax?

Business relief

Gifts and inheritances of relevant business property qualify for relief that reduces the taxable value of the property by 90% for the purposes of Capital Acquisitions Tax.

Agricultural relief

Tax relief applies to gifts and inheritances of agricultural property and reduces the market value of the property by 90% for the purposes of Capital Acquisitions Tax.

Dwelling Property Relief

An individual who inherits a house will qualify for this relief and be exempt from CAT on the value of the inheritance if:

  1. The property was the main home of the disponer (the person that died), this condition does not apply however if you are a dependent relative.
  2. The property was the main residence of the beneficiary for three years before the disponer’s death.
  3. The beneficiary does not own or have interest in another dwelling house.
  4. The beneficiary lives in the property for six years after receiving the inheritance. However this does not apply if you are over the age of 65.

Inheritance tax and estate planning is a complicated area and I would always advise taking professional advice on both inheritances you receive and estate planning for your own assets.