Succession planning: How to pass on wealth efficiently

To pass assets to the next generation in the most efficient way, it’s vital to take a smart approach. A structured succession plan can help mitigate the risk of conflict between your family members and ensure your wishes are carried out.

Having a succession plan also helps you to determine the tax liabilities that could arise on transferring assets to future generations now or in the future. Not only that, it may also reduce the CAT that must be paid.

Understand tax-free thresholds

The gift/inheritance tax-free thresholds haven’t changed in recent years and the CAT rate is still 33%. 

Family members and others can receive gifts and inheritances CAT-free up to certain thresholds. These tax-free amounts vary depending on the recipient’s relationship to the person making the gift or inheritance.

The three different tax-free group thresholds are summarised below:

CGT/CAT offset

When an asset is gifted, a liability to CAT and CGT can arise in respect of the same disposal. Where this occurs, the CGT payable is allowed as a credit against the CAT liability.

This rule is important where it is intended to gift a mix of assets over a period of time. It may be beneficial to gift assets not subject to CGT first and utilise the beneficiaries’ relevant tax-free CAT threshold before gifting assets subject to CGT, where the CGT may be offset against the CAT payable.

Make the most of the small gift exemption

The small gift exemption allows anyone to gift another person up to €3,000 tax-free each year without eroding their tax-free thresholds. People can overlook this exemption, but it can be really beneficial, especially if it’s well used over time.

Recipients don’t have to be family members and there’s no annual limit to the number of people to whom you can make such a gift.

Parents and grandparents often use the small gift exemption to pass wealth to their family over time, but it can’t be claimed retrospectively so it makes sense to make use of it every year if possible. 

For example, you may gift a child or grandchild €3,000 a year from the time they’re born. In other words, each child could have received tax-free gifts of €54,000 by the time they turn 18 (or €108,000 if both parents or two grandparents use the exemption).

To gift money to anyone under 18, consider doing it through a bare trust. This would mean the child or grandchild could not access these funds until they are 18 or older.

Family partnerships

You can also use a family partnership to pass economic ownership of your assets to your children. Family partnerships enable you to retain control of these assets as they grow in value in the child or children’s name(s).

Under a family partnership, the increase in value should not be subject to CAT on the death of the parents.

Family partnerships also enable you to teach your children about investments and taxation.

Consider taking out a Section 72 policy

If you expect your family or other heirs may face significant CAT liabilities when you die, look at paying for a Section 72 policy. This is an insurance policy used to cover the inheritance tax due when the policyholder dies. 

You pay an annual premium for the rest of your life in return for a predetermined level of cover. The main benefit of this policy is that the proceeds of the policy are not taxable once they’re used to pay an inheritance tax liability.

Key actions individuals can take today

1. Consider the relevant tax-free thresholds

Consider the relevant tax-free thresholds for your beneficiaries – particularly if your children have fully used their Group A tax-free thresholds. 

It may also make sense to make gifts to your grandchildren within the Group B threshold to reduce the ultimate CAT bill – particularly if your children are comfortable financially or may make substantial gifts or inheritances to their children in the future.

2. Try to use the small gift exemption

The annual small gift exemption is a useful way to pass wealth to future generations without eroding the beneficiaries’ tax-free thresholds. 

Using the small gift exemption every year also reduces the assets that will eventually pass through your estate. Those could be subject to CAT at 33% over the beneficiaries’ tax-free thresholds.

3. Plan well to offset CGT/CAT 

Consider the CGT/CAT offset if you’re passing on assets throughout your lifetime. The CGT/CAT offset is only available on the same event, so think carefully about the timing of mixed asset transfers.

4. Consider setting up a family partnership

The advantage of a family partnership is that it can be highly tax-efficient. While the beneficiaries must pay CAT on the value of the assets at the date of transfer to the partnership, there’s no further CAT on the death of the parents. 

That means your children or grandchildren won’t have to pay tax on the growth of the assets held in the partnership. 

Partnerships can also be a good way to educate your children or grandchildren regarding investments and taxation.

We are here to help you

While the potential for a significant tax liability on transferring assets to your children can be daunting, don’t make the mistake of postponing decisions about it. Taking small steps now can mean a significant tax saving for your children. 

Contact us for more information about succession planning and passing your assets to the next generation.