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Ask the Lawyer: The rules around capital acquisitions tax are not always straightforward
Q. Based on the probate valuation of my late mother’s estate we, her two children and executors, had a small capital acquisitions tax liability. Her house, however, sold for less than anticipated, so the net proceeds of our inheritance ended up being less than the €335,000 parent-child inheritance tax threshold in place at the time of her death.
We ended up with €302,000 net each, rather than the €339,000 declared in the statement of affairs submitted to Revenue. Do we still have a tax bill? We spent about €6,000 on heating, insurance and roof repairs before probate was granted. My mother also bequeathed money to two grandchildren and an in-law to be paid from the residue of her estate.
The residue was insufficient, however, so we used about €20,000 from the house sale to honour her wishes. A. The reader and his sibling inherited their mother’s house through a specific bequest in her will.
“Beneficiaries of a specific bequest are charged capital acquisitions tax , based on the value of the asset on the date of the grant of probate”, says Deirdre Farrell, partner at Amorys Solicitors LLP. If the house value on this date puts each sibling’s inheritance above their parent-child tax-free threshold, they will pay CAT of 33 per cent on the amount over the threshold. The threshold at the time of their mother’s death was €335,000.
It has increased to €400,000 since, but that is irrelevant for them. As the siblings decided to sell the property, a second tax, capital gains tax comes into play. CGT is assessed on the difference between the sale price of the house and its value at the date of their mother’s death, less any costs of acquisition and sale.
Things like estate agent and legal fees, as well as any money spent on enhancing the property can be offset against CGT.
“Routine repairs, heating and insurance are not considered enhancements”, she says. “To be deductible, enhancement expenses must be capital in nature and not day-to-day costs incurred to maintain the asset in the state in which it was originally bought or acquired,” says Farrell.
“Despite the fact that in this case, on one view, capital acquisitions tax may be considered to form part of the incidental costs of acquiring the asset, it is the Revenue’s long-standing view that inheritance tax is not a deductible cost for CGT purposes,” she says. “If, however, the property sold for less than its valuation at the date of his mother’s death, that loss, or at least part of it, can be carried forward and offset against any future gains indefinitely,” says Farrell.
Regarding the residue in the will being insufficient to pay the grandchildren and in-law named, such legacies abate, or decrease, in the proportion the legacies bear to the net residue available for distribution, says Farrell.
“If there is no residue, unless a contrary intention is stated or shown in the will, the legacies abate in full – meaning, unfortunately, those legatees will not be paid what was provided for them in the will. ” The reader and his sibling gave money to the grandchildren and in-law from the proceeds of the house sale to honour their mother’s wishes. Farrell sees no problem with this.
While such an approach is commendable, in this case, the legacies are treated as gifts and cannot be used to reduce the reader’s tax liability, she says.
“Goodwill is not rewarded in this case unfortunately,” says Farrell. Whether recipients will have to pay capital acquisitions tax on gifts can depend on their relationship to the reader and his sibling. The small gift exemption allows any person to receive up to €3,000 per calendar year from any number of individual donors tax-free – so that would be €3,000 each from the reader and his sibling.
Nephews and nieces have a tax-free lifetime limit of €40,000 from uncles and aunts. As the total amount paid in this case was approximately €20,000, the beneficiaries may have no tax to pay. The name of the reader who submitted the question is not being published to protect the identities of those involved.
Please send your legal queries to Joanne Hunt, Ask the Lawyer, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to joanne.hunt@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
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