Succession planning seminar

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Inheritance & Succession Tax Planning

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  • ____________________________________________________________
  • Succession planning seminar

    1. 1. Inheritance Tax &Succession Planning Seminar December 2012 Andrew Guerin Email: andrew.guerin@aguerin.ie T +353 (0)21 4840721 I F +353 (0) 21 4840726 I E info@aguerin.ie I W www.aguerin.ie A 19 White Street, Georges Quay, Cork, IrelandManaging Director – Andrew Guerin C.P.A A.I.T. Authorised Investment Intermediaries 1
    2. 2. Introduction  Basic mechanics of CAT  Reliefs  Statistics  Legal issues  Recent Changes  Banking Issues  Examples and illustrations  Pitfalls and planning opportunities  Action Plan12/17/2012 2
    3. 3. Relevant Legislation Rules Legislation- Capital Acquisitions tax Act 1976 CAT consolidation Act 2003 Territorial rules – Donor or donee is resident or ordinarily resident in state (3 year rule) and /or Gift or inheritance situated in the state Aggregate gifts/inheritances since 5 December 199112/17/2012 3
    4. 4. Charge to Inheritance tax If a chargeable person becomes beneficially entitled in possession, to any benefit for less than market value ,he or she is deemed to receive a gift or inheritance and therefore liable to Capital Acquisitions tax.12/17/2012 4
    5. 5. Events which Trigger Liabilities  Gift or inheritance  Free use of property  Interest free loans  Write off of loans  Transferring assets at less than market value12/17/2012 5
    6. 6. 2010 Finance Act changes  New pay & file regime  Compulsory electronic filing for all Reliefs  Introduction of surcharge for late filing  Abolition of secondary accountability  Abolition of the 12 year charge on property  CAT year 1 Sept to 31 August12/17/2012 6
    7. 7. Exemption Thresholds Year 2013 2012 2009 Child 225,000 250,000 545,544 Lineal Ancestor 30150 33208 54544 Stranger 15075 16604 2712712/17/2012 7
    8. 8. CAT Rates  Increased from 30% from 5 December 2012  Now 33%  Could reach 40% (Was 50 % in 1984)  UK Rate 40% (Threshold exemption stg£325/€400K)-Gifts tax free12/17/2012 8
    9. 9. CAT ExamplesExample: Couple Aged 60 Estate Worth €1 Million 2 Children, 4 GrandchildrenPotential CAT €000Inheritance 1,000Exemption (225 x 2) ( 450)Taxable 550CAT @ 33% 1817th February 2012 9
    10. 10. CAT Calculation Possible Reductions  5 Year Plan  Utilise all thresholds  Use annual €3k gift exemption Estate €1 Million Beneficiaries  2 Children  2 In-laws  4 Grandchildren  Total Beneficiaries 8  Annual Gift of 3K  8 x €6k (3 x 3) 48k Per Annum  5 Years (48k x 5) 240K7th February 2012 10
    11. 11. CAT Calculation €’000Net Estate after 5 Years 760Beneficiaries  2 Children (225 x 2) 450  2 In-laws (15 x 2) 30  4 Grandchildren (30 x 4) 120Total Exemptions 600Taxable 160CAT @ 33% 53 kTax Saved 128kConsider S72 Relief to elimate 53K CAT liabilityZurich Quote€500k cover joint life 2nd Death (50 Year Old)Cost €322 p/m - €3864 p/a ,Cost for 60 Year Old !!!!!!!!7th February 2012 11
    12. 12. Reliefs  Spouses and Civil Partners (exempt)  Annual exemption threshold €3000-(Gifts only)  Dwelling House Relief  Favourite nephew/niece relief  Business Property Relief (90 % reduction)  Agricultural Relief (90% reduction)  CAT and CGT on same Transaction (Credit offset)12/17/2012 12
    13. 13. Dwelling House Relief Gift or inheritance of private dwelling is exempt from CAT if  The beneficiary has continually lived in the house as his/her only main residence for 3 years prior to the date of gift/ inheritance  At the date of gift/ inheritance the beneficiary is not beneficially entitled to any other dwelling house or to any interest in another dwelling house.  A period of Occupancy by the donee when the house was also occupied by the disponer as their only or main resident, will be disregarded as a period of occupation in that house unless the disponer is compelled, by reason of old age or infirmity, to depend on the services of the donee for that period.12/17/2012 13
    14. 14. Business Property Relief  The relief consists of a reduction of 90% of the value attributable to the relevant business property taken by the beneficiary.  Applies to “relevant business property” defined as the business or the business interest in the business carried on by a sole trader or by a partnership.  Includes Property used for the purpose of the business if transferred at the same time as the business  Conditions to be satisfied:  The business must be owned by the disponer for at least 5 years prior to the transfer in the case of a gift and 2 years in the case of an inheritance.  The assets must remain business assets for at least 6 years to avoid a claw back of the CAT relief. Commission on taxation proposed 75%reduction!!!!12/17/2012 14
    15. 15. Business Relief Example:  John was gifted the family business on the 1st July 2012 on the retirement of his mother aged 65. The taxable value of the business was €3500.k. Business relief is calculated as follows  Taxable Value Prior To Relief 3500k  Reduction of 90% 3150k  Revised Taxable value after relief 350k12/17/2012 15
    16. 16. Business Relief Example € „000  Revised Taxable Value 350  Group 1 Threshold 225  Less Annual exemption 3  Taxable Figure 122  Tax 33% 40.26K12/17/2012 16
    17. 17. Agricultural Relief  The value of the gift/inheritance will be reduced by 90% where the following conditions are met.  Agricultural property- includes lands, buildings, crops, trees, underwood, farm machinery, livestock.  Disponer an individual owned and worked the lands for 10 years prior to the transfer  80% of market value of the assets of the beneficiary must consist of agricultural property- Lands, buildings, crops, trees, underwood, farm machinery, livestock.12/17/2012 17
    18. 18. Capital Gains Tax Retirement relief  Retirement relief is available to anyone  Over the age of 55  Held the business assets for 10 years or more  Worked the business assets for 10 years or more. If they sell the business to a third party and the proceeds are €750,000 or less they will receive all tax free. Excess over €750 k taxed at an effective rate of 50%. FA 2012 reduced the consideration limit from €750k to €500k for individuals >66 in respect of disposals after 1.1.2014. Qualifying disposals to children continue to be exempt . CGT Relief:  If they Transfer the business to a family member and satisfy all the conditions the transfer will be tax free.12/17/2012 18
    19. 19. CAT & CGT on Same Transaction Example: Asset (shares costing €1) valued €1m sold and proceeds gifted to nephew CGT €000 Proceeds 1,000 CGT 330 Net Cash 670 CAT €000 Gift 670 Exemption ( 30) Chargeable 640 CAT @ 33% 211 Total Tax (330+211) = 5417th February 2012 19
    20. 20. CAT & CGT on Same TransactionGift Asset to Nephew: €000CAT (1,000 – 30 @ 33%) 320Less CGT (1,000 @ 33%) 330Credit restricted to CAT 320Net liability €330 (saving €211k)7th February 2012 20
    21. 21. Illustrations  Offshore Estate (Beneficiary Irl Resident)  Investment Structure including Preference Shares  Unknown Offshore Gift/deposit account (date of gift)  3 Brothers- Generation Skipping  Nursing home –consideration paid. Documentation.  Cash funds –Joint names (IT 8 clearance letter -€5ok)12/17/2012 21
    22. 22. Recent Changes  Reduction in threshold  Increase in Capital Tax Rates  Self Assessment  Electronic Filing and Payment  Surcharge for late returns  PPS Numbers12/17/2012 22
    23. 23. Miscellaneous  Loans  Free Use Of Property- Annual rent less maintenance  80% Rule (File a return)  Joint Names- Property ,Investments ,Bank & Insurance  Life Assurance Policies - S.60 /73-(Not taxable)  Capital gains tax –Deemed disposal at market value  Life/limited interests (Schedule 1.Part1 CATA 2003)  Disclaimers -(potential double tax)  Gift within 3 years –(Double tax)  Documentary evidence. (loan agreements, consideration paid etc)12/17/2012 23
    24. 24. Other Tax Considerations Capital Gains Tax (no CGT on death) Stamp duty - 2% Commercial / 1% Residential MV < €1M. Consanguinity Relief (commercial 50% reduction abolished from 1.1.2015) Residence abolished in December 2010 Discretionary Trust Tax 6% Once off (50% Red) 1% Annual12/17/2012 24
    25. 25. Provision for Children  Discretionary trusts  Offshore trusts  Partial consideration (Fund CGT)  Pensions (ARF)  Transfer to spouse-Marginal IT 41%  ARF inheritance to child 33% CAT  Consider S72 Insurance policy12/17/2012 25
    26. 26. Various Structures  Corporate/limited partnerships  Family Arrangements Trusts:  Bare trusts-Nomineeships  Fixed interest trust (Life interest)  Protective trust  Discretionary trust12/17/2012 26
    27. 27. Company Structures  Trading Companies  Issuance of shares to children  Shareholders /partnership agreements  Use of Preference Shares  Deferred Shares  Key man insurance  Partnership Insurance12/17/2012 27
    28. 28. Taxation on Structures  On creation of each asset protection structure  Ongoing taxation  Implications on unwinding the structure12/17/2012 28
    29. 29. Filing Requirements  CAT Return (IT 38 ) file by 31 Oct 2012  Extended to 15 Nov 2012 for electronic filing and payment.(Laser card –Electronic fund transfer)  80% rule disponer must file CG15  Details of gifts /inheritances received to be included in Income tax return.  Payment by instalments (5 years)  Expressions of doubt.  Secondary accountability  Double Taxation Relief12/17/2012 29
    30. 30. Legal Issues  Wills (34% of population have wills)  Succession act 1965  Powers of Attorney (Enduring powers of attorney)  Discretionary Trust Wills  Discretionary Trust Levies (6% & 1%)-Deferral of CAT.  Trusts  Structuring Investments12/17/2012 30
    31. 31. Implications of no Will Die intestate No input into distribution of estate Succession Act 1965 rules will apply S.67 (2) states that if an individual dies intestate with spouse and issue that: a) spouse takes two thirds b)Remainder is taken by children Non existence of will make makes CAT planning impossible 12/17/2012 31
    32. 32. Asset Protection  Timing of transfers  Bankruptcy Act 1988  Personal Insolvency Bill 2012  Nama Act 2009  Land & Conveyancing Act 2009  Transferring to Companies(Cash flow)  Sham/intention/credibility  Anticipated gift/inheritance12/17/2012 32
    33. 33. Banking Issues  Preservation of assets/wealth  Gifting assets to financially challenged children12/17/2012 33
    34. 34. Tax Pitfalls  Late Returns  Unaware of potential tax exposure (Free use of property)  Surcharges (5 % and 10%)  Overlooked Gifts/ Free use of Property? Loans Etc  Undervaluing assets (Penalties) _Difficult to Value  Properties not in joint names  Absence of powers of attorney(Enduring powers )  Cant always rely on formal valuations.12/17/2012 34
    35. 35. Opportunities  Use annual €3000 exemption threshold- (Gifts only)  Avail of Reliefs Mentioned  Transfer assets sooner rather then later  Utilise s72 Policies (Tax efficient)  Generation skipping  Trusts12/17/2012 35
    36. 36. Annual Exemption Threshold  Amount €3,000 –Gifts only  Per Annum /per individual  Each individual can receive €3,000  Potential tax saving per annum  Married couple with two children could receive  €3000 each ,from each disponer (grand parents)  €3k *4*2=€24000.  Potential Cat saving p/a €7920 (10 years €80K)  Cover college fees.  Consider investing in say An Post(Risk free !!)12/17/2012 36
    37. 37. Opportunities  Contribute Items Of Heritage  Generation Skipping  Regularly Review Wills  Open Lines of Communication with spouse/partner, children and advisers12/17/2012 37
    38. 38. Practical Approach Sensitive area Substantial wealth still exists Balancing act-distribute wealth but retain self preservation Prepare Schedule of assets Do Calculation- results frequently stimulate an action plan12/17/2012 38
    39. 39. Impact of Recent FA Changes  Family with 2 children and estate worth €1.4 m  Cat liability 2006 €63K  Cat liability 2013 €313K  Tax liability increased by approx 400% due to reduction in Child exemption threshold by €317K (542k-225k) per child and an increase in the CAT rate of 13%.  In 2009 estate valued €1,084,416 could be gifted without CAT.  In 2013 the figure is €450,000.  Can draw your own conclusions.  This will only get worse.12/17/2012 39
    40. 40. Cash Flow Planning  Property or cash  Due dates 31 October  S.72 Insurance policies  Life assurance  Instalment arrangements  Hardship Provisions s.59 CTA 2003  Payment by transfer of government bonds  Donation of heritage items12/17/2012 40
    41. 41. Action Plan  Start communicating with clients, family and friends  Make a will and appoint guardians  Review existing wills  Prepare schedule of assets  Prepare a CAT computation to quantify liability  Bad news is this liability will get worse  Consider powers of attorney  Utilise the €3000 annual exemption.(Gifts)  Consider gifts sooner rather than later.  Consider benefits of insurance12/17/2012 41
    42. 42. Conclusion  Inheritance tax rates will increase  Liabilities substantially higher than envisaged  Whilst succession planning has frequently been left to evolve this is no longer acceptable particularly bearing in mind that personal wealth has been substantially eroded.  Lets not give the Tax Man more than is necessary.12/17/2012 42
    43. 43. “I intend to live forever or die trying” Groucho Marx12/17/2012 43
    44. 44. Questions/Comments Thank You12/17/2012 44

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