Capital Acquisitions Tax (CAT) is important to consider when you are planning a will, or if you inherit something of value from a loved one. Find information about CAT using the links below.
What is Capital Acquisitions Tax (CAT)
Capital Acquisitions Tax (CAT) is a tax on benefits which can be either:
- Gifts (received from a living person).
- Inheritances (received from a deceased person).
In all cases, a ‘benefit’ is where a person receives something for nothing or for less than the market value. The person receiving the benefit is called the “beneficiary”.
Who pays CAT
If you receive a gift or inheritance from anyone other than your spouse or civil partner, you must pay tax. However, if you receive a gift or inheritance of Irish property from your spouse or civil partner, you do not have to pay any tax: it is ‘tax exempt’.
The group threshold
The relationship between a person receiving the benefit and the person providing it can determine what portion of the benefit is free from tax. The amount that a person can receive from another tax free is determined by the ‘group threshold’.
There are three group thresholds: Group A, Group B and Group C. The group thresholds are updated each year. Your solicitor can explain the details of these group thresholds, and how they work.
Children are Group A. This is the largest threshold, meaning that they can inherit larger amounts free of tax than any other group.
If you qualify under 'Group A', benefits you received from a person with the same relationship to you as the person currently providing the benefit can use up your group threshold. For example, if you received an inheritance from your mother two years ago and a gift from your father this year (both Group A), the value of your mother’s inheritance would be added to the value of the gift from your father and taken from your group threshold.
The group threshold for Group B is much smaller than Group A. People in this group include the following:
- Brothers and sisters.
- Nephews and nieces.
Everybody else is Group C, the smallest threshold.
After the group threshold is used
The group threshold is a lifetime allowance. After it is used, you must pay tax on the balance of the benefit. This is paid at the rate that applies on death or at the time of the benefit.
This aspect of tax law is complex, with several conditions and exemptions. We recommend that you talk to your solicitor.
Reducing the impact of inheritance tax
Proper estate planning with your solicitor can minimise the tax that your beneficiaries have to pay. Ask your solicitor to explain:
- The tax reliefs and exemptions available.
- How you can divide up your property to use all available group thresholds.
- How your beneficiary can plan to fund the tax.
A number of exemptions are available which can lower the tax you have to pay (or, in rarer instances, remove the requirement for you to pay tax).
- Agricultural property.
- Business property.
- Certain nephews or nieces.
- Charitable inheritances or gifts
- Dwelling exemption.
- Children of a deceased child.
- Surviving spouse or civil partner.
Certain other types of property may be exempt from CAT. Each exemption and relief has conditions that must be met and these conditions can change under annual finance legislation.
Many of these reliefs and exemptions provide for a ‘clawback’ (take back of reliefs) of the relief if certain conditions are not met during the first six years after you apply for the relief. Clawback means that the tax on your gift or inheritance will be re-calculated as if the relief or exemption never applied and you may have to pay the CAT now due.
Managing CAT liability
Other options available when managing CAT liability include:
- Small-gift exemption. The first €3,000 of any gift to any person each year is exempt from tax. You could, for example, give each child or grandchild €3,000 each year tax free.
- Paying into a special type of insurance policy where the proceeds are used to pay the tax.
- Setting up a discretionary trust – a trust is a financial arrangement in which your money or property is given to trustees to mind for your beneficiaries. The trustees are the legal owners of the property but hold the property for the benefit of (or “in trust” for) the beneficiaries. There is a special tax that arises called Discretionary Trust Tax that should be considered before setting up a discretionary trust.
Your solicitor will advise you on the best way to manage your CAT liability, and the reliefs or exemptions that may apply.
Unmarried partners and inheritance tax
A ‘cohabitant’ or ‘partner’ in the general meaning (not a ‘civil partner’) is treated as a stranger for tax purposes and cannot avail of the spousal exemption. Tax law does not recognise a ‘common law spouse’.
However, a partner may claim for compensation under the cohabitant legislation. Any award from the Court will be free from CAT.
If your cohabitant has died, and you are considering a claim for compensation, we recommend that you talk to your solicitor.