Favourite ways to avoid huge bills for inheritance tax

Financial advice for farmers
Favourite ways to avoid huge bills for inheritance tax

A farm transfer to a favourite (as defined by the taxman) nephew or niece can save a family large amounts of inheritance tax.

In many rural families, there is a special relationship between aunts or uncles, and their nieces and nephews.

In some cases, aunts or uncles never married, and may have continued living on the farm, to look after their parents.

In some cases, predominantly in the distant past, nieces or nephews went to live with their childless aunts or uncles for periods of time, more especially when their own families expanded beyond their homestead’s capacity.

Also at work in rural relationships is the bond between a farmer and their farm holding, continued by that farmer wishing to transfer their holding onto the next generation.

That’s why so little land comes to the market in Ireland, at just 0.3% in any one year.

The statistics suggest that, theoretically, it would take over 300 years for any given bit of land to come to the market.

On the ground, literally, farmers who have no direct son or daughter themselves often will consider making a will transferring their farm to a niece or nephew as their nearest next of kin, and with the wish that the land is kept in the family for another generation.

Of course, such farmers may also consider transferring the farm to their own surviving brothers or sisters, rather than to a niece or nephew.

From a tax planning perspective, the transfer to a nephew or niece might make more sense.

Firstly, transfer directly to a brother or sister can result in two rounds of taxation.

A brother or sister inheriting a farm from their sibling will usually have inheritance tax to pay on the value of the land, albeit some relief may be available.

When that brother or sister wishes to transfer the farm to their own child in due course, there can potentially be exposure to three other taxes, for the child — capital gains tax, stamp duty and gift tax, known formally as capital acquisitions tax.

To avoid potentially several rounds of tax, not to mention incurring legal fees at each event, willing land directly to nieces or nephews might be a whole lot more efficient.

Apart from avoiding multiple instances of taxes, the tax rules between nieces and nephews and their aunts and uncles can be quite “kind”, compared to “normal” inheritances, when it comes to agricultural property.

A niece or nephew can, for tax purposes, be regarded as having the same status as a direct child of the uncle or aunt, meaning that the tax-free threshold available to direct children is used between uncle or aunt and niece or nephew.

Usually, nieces or nephews can only receive gifts or inherit €32,500 from an aunt or uncle tax-free, with gifts or inheritances above this level taxable at 33%.

Where a niece or nephew qualifies as a favourite niece or favourite nephew, then the tax-free threshold is more than ten times higher, at €335,000.

Where that beneficiary also qualifies for agricultural relief or business relief, then the amount of agricultural property that can potentially be inherited tax- free increases again, by another ten-fold, meaning agricultural property worth up to €3.35m can be inherited by a favourite niece or nephew tax-free, where relevant criteria are satisfied.

In this instance, the beneficiary is claiming two concurrent reliefs, favourite nephew/niece relief, and agricultural/business relief.

Each of the reliefs has its own rules and criteria which must be met.

Importantly, to qualify for favourite niece or nephew relief, the child must work in the business for the five years prior to their receipt of the gift or inheritance of property from their uncle or aunt, and the work performed must have been substantially on a full-time basis.

This translates into a requirement to spend an average of 24 hours per week working for their aunt or uncle, if the business has multiple employees, or an average of 15 hours per week, if the business was run exclusively by their aunt or uncle, either on their own or together with their spouse, if applicable.

If, for instance, the niece or nephew had worked for their uncle or aunt for a few years in their youth, and a break then occurs, before inheriting property, then the relief will not apply.

All too often, this issue arises where the uncle or aunt requires full-time nursing care, and their business stops for a period, before ultimately the farmland is transferred to a niece or nephew, through their uncle or aunt’s will. 

Had the property been transferred during the uncle or aunt’s lifetime, relief may have been available.

Where property is transferred by the spouse of their blood relative uncle or aunt, even though that person may commonly be thought of as the beneficiary’s aunt or uncle, the legislation generally treats such a gift or inheritance as from a stranger.

From a tax perspective, clever planning can result in savings of many thousands in inheritance tax.

Take, for example, an uncle who has an initial plan to leave his farm worth €2.5m to his wife, with the intention that she will transfer the farm to his nephew upon her death.

In this instance, the nephew will, at best, have an inheritance tax liability of €71,775, if he can qualify for agricultural or business relief.

If, instead, the uncle had left his spouse a life interest in the property, with the farm to pass to his nephew upon her death, then, at best the tax liability could have been reduced to zero, with the combination of both agricultural relief and favourite nephew relief.

Professional advice should be obtained relevant to each individual’s specific circumstances.

Chartered tax adviser Kieran Coughlan, Belgooly, Co Cork (www.coughlanaccounting.com)

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