My stepfather died last year leaving his entire estate to me, valued at circa €350,000, half in cash and the rest his house. I previously inherited about €90,000 from an aunt.
I would like to give €70,000 of my inheritance to my only brother who was not included in the will. Should I consider a deed of variation to give this to my brother tax effectively under his threshold or can I give it to him after probate as a gift?
Does the €90,000 go against my threshold of €335,000 and result in me paying 33 per cent of the excess?
Mr MW, email
I spend a lot of time in this column advising people to make wills so that any assets they may have are allocated as they would desire in the event of their death. Otherwise, they are treated under the rules of intestacy where the law sets down very precisely who gets what – regardless of what the person who has died would have wished.
However, occasionally the beneficiaries of a will – or indeed those entitled to benefit under intestacy – can decide among themselves to reallocate assets they have received under a will.
There are two ways to do this. A person can disclaim their benefit or part of it, where they disclaim a specific bequest or their share of the residue of the estate – the amount outstanding after all specific bequests have been distributed. However, this is, in general, a blunt instrument and you don't get to direct where that disclaimed benefit goes.
Then there is the deed of variation, or deed of family arrangement. This allows the beneficiaries to redivide the estate of the dead person. I can see the attraction as it is certainly an arrangement that would allow you to direct where you want the benefit to go but it requires the assent of all beneficiaries and it will likely have tax implications for both of you.
The assent of all beneficiaries is academic in this case as I understand you’re the sole beneficiary of the estate.
No CAT relief
The big issue is that I cannot see that the Revenue Commissioners make any allowance under capital acquisitions tax (CAT) rules for a deed of family arrangement. That means that, regardless of what you do, you might be charged for the full value of the estate under CAT and your brother might also face a CAT tax charge on the "gift" of €70,000 he receives from you.
In effect, Revenue views it as two separate arrangements.
This is at odds with the UK law on deeds of variation where the ultimate beneficiaries (in this case, your brother) are treated as inheriting the assets directly from the deceased.
That could deliver a surprise and unwelcome tax bill for each of you.
As it stands, the estate is valued at €350,000. You can avail of a category A threshold exemption on an inheritance from your stepfather so, as long as you have not already inherited from a parent, you can receive up to €335,000 without being liable to tax.
At 33 per cent, the CAT bill on the remaining €15,000 above that threshold will leave you with a tax bill of €5,000.
If you use a deed of family arrangement to give your brother €70,000, my understanding is that this will be seen as a gift to him. As brothers, the CAT threshold exemption between you is category B – €32,500 over the lifetime of the beneficiary.
So, assuming he has received no other gift above the value of €3,000 or inheritance from you or any other sibling, a grandparent or an aunt or uncle, he will face a tax bill of 33 per cent of €34,500 (the amount by which this gift exceeds his exemption threshold, minus the €3,000 small gift exemption he also has on any gift). That’s a tax bill of €11,385.
As you can see, using a deed of family arrangement/deed of variation does not change your brother’s tax position in this case as it will not be treated as a category A inheritance in Ireland. Tax wise, it is essentially the same whether you give him the cash under a deed or after probate.
Capital gains tax
So why opt for the deed of family arrangement at all? Well, the relief it does grant in tax terms is against capital gains tax. If what you were passing to him was an asset rather than cash, the deed might make sense.
Transferring such assets would generally see you facing a capital gains charge on the increase in value between the time your stepfather died and the time you pass the asset on to your brother.
The relief, under section 573 (6) of the Taxes Consolidation Act, gives you a two-year window to make the transfer, although this can be extended by a further year with specific Revenue permission.
But, in this case, you are not looking to transfer an asset but rather cash to the brother who has been left out of the will. So where does that leave you?
As I see it, there are two ways you can execute the outcome you seek in a more tax-efficient manner.
The first is long term and might not suit. That is by availing of the small gift exemption. You – and your partner if you have one – can each gift this brother €3,000 a year each year free of tax. The downside is that it will be 12-24 years before he receives the full amount you are talking about, depending on whether one or two of you are doing the gifting.
That may suit him (and you) but it may not.
Intestacy
The other route also has risks – and potential tax implications. As the sole beneficiary, you could disclaim your inheritance. The estate would then be divided according to the rules of intestacy under the Succession Act 1965.
The risk here is that if you are not the only two children of your stepfather, others about whom you are unaware might also have a claim to the estate. That could even end up in the courts to no one’s financial benefit.
However, if you are the only children, you will each share half the estate. That, of course, means your brother would inherit roughly €175,000, not €70,000 as you were speaking about. You would inherit the same.
Both of you would be under your category A CAT exemption of €335,000 all other things being equal.
So far, so good: no tax bill.
You could then, if both of you agreed, execute a deed of family arrangement to reflect your original plan – that your brother get €70,000. But this time, you would effectively be receiving €105,000 from your brother and you would face a CAT tax bill of €33,660 as your previous inheritance from your aunt will have more than exhausted any category B exemption for you.
Finally, that inheritance from your aunt will not in any way affect your inheritance from your stepfather as it now stands – ie, before any of the arrangements gone through above. The inheritance form your aunt is treated under category B, that from your stepfather under category A: it is like parallel tracks; they do not meet or affect each other.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into
