When it comes to life’s certainties, death and taxes are often cited as the two constants. In Ireland, the intersection of these two comes in the form of inheritance tax—formally known as Capital Acquisitions Tax (CAT). For those who stand to inherit assets, understanding CAT and how to reduce its impact is vital for protecting family wealth and avoiding unnecessary financial pressure during already difficult times.
This blog will guide you through five effective strategies to help minimise or avoid inheritance tax in Ireland, based on current laws. With potential legislative changes coming in Budget 2025, now is a good time to understand your options.
1. Use a Section 72 Life Insurance Policy
A Section 72 policy is a specialised life insurance plan designed to cover the inheritance tax liability of beneficiaries. Named after Section 72 of the Capital Acquisitions Tax Consolidation Act, this type of insurance is one of the most practical tools for estate planning in Ireland.
Here’s how it works: the insured person takes out the policy with the intention that the proceeds will be used by their beneficiaries to pay the CAT due upon their death. The amount paid out under the policy is tax-free, provided it’s used specifically to settle the inheritance tax. However, any leftover funds that exceed the tax liability will be taxed at the usual 33% rate.
This solution is especially useful when beneficiaries inherit non-liquid assets, like property or investments, which can be difficult to sell quickly. Without a Section 72 policy, they might be forced to sell these assets just to pay the tax bill.
To benefit from this policy, it must be taken out before the insured reaches 75 years of age. It can be structured as either a single-life or joint-life policy, the latter being popular among spouses. Premium costs depend on several factors, including age, health, and the required level of coverage. It’s recommended to consult a financial adviser to determine if this is right for your estate plan.
2. Take Advantage of Spousal Exemptions and CAT Thresholds
One of the simplest ways to sidestep inheritance tax is to leave assets to your spouse or civil partner. Under Irish law, transfers between spouses and civil partners are entirely exempt from CAT, regardless of the amount. This makes joint-life Section 72 policies especially useful, as the tax only becomes relevant when the surviving spouse passes away.
For other relationships, Ireland has set lifetime tax-free thresholds, which vary depending on the recipient’s relationship to the deceased:
- Group A (€335,000): Applies mainly to children inheriting from parents.
- Group B (€32,500): Includes siblings, nieces, nephews, and grandchildren.
- Group C (€16,250): Covers all others, such as friends and cousins.
If the value of your inheritance exceeds the applicable threshold, CAT applies at 33% on the surplus. These thresholds accumulate over a lifetime, so every gift or inheritance counts against them.
3. Utilise the Annual Small Gift Exemption
You can receive up to €3,000 from any individual each year without it affecting your CAT threshold. This exemption is particularly effective for passing wealth gradually over time. For example, a couple could gift €6,000 annually to each of their children, tax-free.
This strategy reduces the size of the estate liable for CAT in the future and helps beneficiaries enjoy the benefits of their inheritance during your lifetime. Importantly, these small gifts don’t chip away at the recipient’s lifetime CAT threshold.
4. Qualify for Dwelling House Relief
If you’re inheriting a home and meet specific conditions, you may not owe any inheritance tax on it. To qualify:
- The deceased used the property as their main residence (unless you’re a dependent relative).
- You lived in the house as your main home for the three years before the inheritance.
- You don’t own or acquire another property during this time.
- You continue to live in the home for six years after inheriting it.
This relief can be incredibly valuable, especially considering the high property values in Ireland. However, it does come with strict requirements. If you move out—even briefly—you may no longer qualify, unless you return and meet the three-year residency rule again.
Some argue that these criteria are too restrictive, especially for those who moved out due to high rental prices or to buy a modest property. Reforming the rules could help modernise the tax code to better reflect real-life financial situations.
5. Explore Business and Agricultural Relief
For individuals inheriting farms or businesses, specific reliefs can significantly reduce CAT. These include:
- Business Relief: Reduces the taxable value of qualifying business assets by 90%.
- Agricultural Relief: Offers the same reduction for qualifying farmland and agricultural property.
Eligibility criteria are strict and typically require that the assets continue to be used for business or farming purposes for a set period after the inheritance. These reliefs can be complex, so it’s best to consult a tax specialist if you think you might qualify.
Final Thoughts
Inheritance tax in Ireland is a significant consideration for many families, but with careful planning, its impact can be managed or even eliminated. Whether it’s taking out a Section 72 policy, making annual gifts, or leveraging legal exemptions, there are strategies available to reduce the financial burden on your loved ones.
As tax rules are always subject to change—especially with Budget 2025 on the horizon—staying informed and proactive is key. Consider seeking professional advice to build an estate plan that’s tailored to your situation and ensures your assets are passed on in the most efficient way possible.