As our clients move through different stages of their financial lives, a noticeable shift tends to occur. The focus gradually evolves from immediate financial needs toward longer-term planning, particularly around retirement and increasingly, the efficient transfer of wealth to the next generation.
This naturally leads to more structured conversations about estate planning. At its core, estate planning is not just about tax, it is about clarity of purpose. What is your wealth ultimately for? Is it to fully support your own lifestyle throughout retirement? To provide meaningful financial support to your children? Or a balance of both?
There is no universally “correct” answer. However, being intentional about this decision is essential, as it directly influences how your estate should be structured.
Tax plays a big role in Ireland
In Ireland, the transfer of wealth is primarily impacted by Capital Acquisitions Tax (CAT). For most families, the key threshold is the Group A (parent to child) threshold, which currently stands at €400,000 per child. Any inheritance above this level is subject to CAT at a rate of 33%. There are lower thresholds for other less direct relationships.
While this may initially seem like a relatively generous threshold, it is increasingly being exceeded due to rising property values and accumulated savings over a lifetime. As a result, many beneficiaries now face significant tax liabilities on inheritances that would previously have fallen below the threshold. Before the financial crash in 2009, this Group A threshold was over €542,000.
It’s also important to remember that CAT is a liability for the recipient, not the person giving the gift or leaving the inheritance. This distinction often shapes how families approach planning.
There are planning options available
The good news is that there are several well-established strategies available to mitigate future CAT liabilities, particularly when planning is done early. One of the simplest and most effective tools is the Small Gift Exemption. This allows any individual to gift up to €3,000 per year to any recipient, completely free of CAT and without impacting the child’s lifetime threshold. Over time, this can become a powerful method of transferring wealth gradually and tax-efficiently.
For example, a couple with two children could transfer €12,000 per year (€3,000 x 2 parents x 2 children) without any tax implications, significantly reducing the eventual taxable estate.
Using financial products to fund tax liabilities
For those who want greater certainty around the preservation of assets, particularly illiquid ones like property or family businesses, financial products can play a central role.
Two commonly used structures in Ireland are Section 72 and Section 73 policies:
- Section 72 policies are life assurance policies specifically designed to cover CAT liabilities arising on death. The policy proceeds can be used by beneficiaries to pay inheritance tax, ensuring that assets do not need to be sold to meet the tax bill. The headline benefit of these policies is that the proceeds of the policy will ultimately be tax-free to the beneficiaries, as long as the proceeds are used to pay Inheritance Tax. With current CAT rates of 33%, this is a big future saving.
- Section 73 policies are savings / investment policies that are structured to cover CAT on lifetime gifts. These are particularly useful where parents wish to transfer assets during their lifetime, but want to ensure that any resulting tax liability is pre-funded.
When structured correctly, the proceeds from these policies can be applied directly against the CAT bill, offering a high degree of certainty and preserving family assets across generations.
Balancing lifestyle and legacy
Ultimately, estate planning is about balance. Some individuals take the view that their wealth is theirs to enjoy fully during their lifetime, with any remaining assets passing on after death, even if that results in a tax bill.
Others prefer a more structured approach, aiming to pass on wealth as efficiently as possible, ensuring that assets such as a family home or holiday property can remain within the family without being sold to fund tax liabilities.
Neither approach is inherently “right”. However, without planning, families may find themselves in a position where valuable assets must be liquidated to meet tax obligations. This is often something that could have been avoided.
Estate planning in Ireland has become increasingly important due to relatively modest tax thresholds and the high CAT rate of 33%. However, with early planning and the right combination of strategies, such as annual gifting and targeted life assurance, families can significantly improve outcomes. A well-structured plan allows you to enjoy your wealth during your lifetime, while also ensuring that your legacy is passed on in a controlled and tax-efficient manner.
If you would like to understand how these rules may apply to your own situation, or explore strategies tailored to your family, we would be happy to guide you through the options.
