An Irish Times guide to the world of personal finance.
Inheritance tax
We are two unmarried sisters who always have lived in the family home. The house originally was bought by our parents for £200 but since then has risen greatly in value. I managed 30 years ago to buy a derelict cottage in the country for £3,000 and have spent all the money and time I could afford in making it habitable. We spend time there as often as is possible and greatly enjoy it. I recently have been told that ownership of this cottage will create enormous problems irrespective of which of us dies first, since I will be leaving it to my sister. Can you explain these tax rules and to whom else they apply, such as married couples, people living alone or with other types of relatives?
Ms C.C., Dublin
As you say, there are likely to be tax problems in the event of your death. As I understand it, the house is in your name and could not be said to be the main private residence of either of you. As such, if, upon your death, it passes to your sister, it will count as an inheritance.
There are rules governing the taxation of inheritances between people and, as you may be aware, the relationship between the person bequeathing the property or other asset and the person receiving it is central to this.
In the case of yourself and your sister, you fall into category B, which governs inheritances to family members such as brothers/sisters, nieces/nephews and grandchildren or even great-grandchildren. In the current tax year, each of these may receive €42,215 before they become liable for gift or inheritance tax, more accurately known as capital acquisitions tax.
Above this level, tax is charged at 20 per cent. Obviously, something like your country cottage is, in today's property market, likely to come way over the threshold of what you may grant your sister.
One way around this may be to spread the inheritance as wide as you can to minimise the tax take. For instance, if you have other relatives you could bequeath the cottage or its proceeds to a number of them including your sister, with a provision that your sister would have access to it for her life.
If the family is a harmonious group, this might be agreed informally, saving on legal time, hassle and money; otherwise, if that is how you want to proceed, you would want to get a document drawn up framing your wishes in a way that does not expose your sister or others to tax charges or legal challenges.
Of course, if your sister dies first, you will still be left with the property to dispose of, so it does no harm in framing a will to consider how this could be done to minimise tax charges. Again, spreading the bequest as widely as possible is the answer. People other than those mentioned in group B above - with the exceptions of spouses and parents/ children - may receive €21,108 in gifts or inheritances free of tax.
However, this is cumulative and any inheritances received since December 5th, 1991, within each group or category are aggregated.
You ask about the situation for other people. There is no inheritance tax on gifts or inheritances between spouses. Between parents and their children, group A, the threshold is €442,148.
One other thing to bear in mind is that you can give €1,250 to any number of people in a given calendar year free of tax. However, this is not much consolation in the case of property.
SSIAs
Please advise me about changing from ACC, which is paying 3.25 per cent variable to a bank paying 4 per cent-plus. What is the process of changing institutions?
Ms N.H., Monaghan
This is something that people with special savings incentive accounts (SSIAs) are going to have to consider as the five-year term of their investment goes by, especially those in variable deposit accounts. The scheme specifically allows for the transfer of SSIAs between one institution and another and, in the case of variable deposit accounts, there should be no charge for this.
Institutions like ACC attracted a lot of savings under the SSIA scheme because they guaranteed not to pay less interest than the European Central Bank rate. This is particularly attractive but, just now, a number of other institutions are offering rates that put the current 3.25 per cent ECB rate in the shade. It is difficult to see how this can continue, as the rates on offer look increasingly unsustainable.
However, while the gap exists, you can move your money from one to the other by notifying both of your desire and ensuring that they fill out a form SSIA 6 on your behalf to notify the authorities of the transfer. Bear in mind that, with most people paying by direct debit, you will want to ensure that it too is transferred to the new institution . . . in such a way that you do not miss a monthly payment. If you get this wrong in the first 12 months of your SSIA scheme, you will have broken the scheme rules and will lose out altogether - and face a hefty tax charge on whatever is in the account at the time.
I have no doubt the banks, building societies, credit unions and post office will be chary about this. After all, the last thing they will want with SSIAs is to find themselves burdened down by administration in transferring accounts. Still, they can hardly be surprised.
Many went to great efforts to outbid each other to attract the funds in the first place; it can come as little surprise if people remain vigilant and demand that their money is where it can grow fastest.
Certainly, people should keep a weather eye at the rates on offer at the institution holding their own SSIA and others. The same applies for equity investments, many of which offer the saver the opportunity to switch funds within the same company.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
