Inheritance tax - CAT vs CGT

sector_000 · 20-04-2021 11:29pm #1

I am in line for an inheritance valued in excess of the €335K CAT parent to "child" allowance. The solicitor thinks the Estate Agent's professional valuation is a bit low and suggests it ought to be upped a bit.

I don't see any advantage to this? The valuation figure was what the professional assessed it at. I have no magic insight to dispute it.

Even if the house happens to sell for higher than the valuation, won't any uplift simply be liable to CGT (which happens to also be at the exact same 33% rate as CAT)?

So no disadvantage to me, and in fact no additional risk, right?

Also, in such a case, would a €1,270 Capital Gains annual tax-free allowance apply?

The Solicitor says "In respect of Capital Gains Tax, the exemption of €1,270 is not available in the case of Executors sale.".

Advice welcome.

hold my beer · 21-04-2021 12:27am

Take the professional's valuation for the IT38. There's no benefit in putting it higher based on the solicitor's opinion. If it does sell for higher, you'll be assessed for CGT on the gain (over the IT38 valuation) and will pay CGT on the gain. And yes you can use the annual exemption in that CGT calc.

DmanDmythDledge · 21-04-2021 10:50am

Use of the annual exemption would depend on whether or not the house is transferred to you before the sale or if the house is sold while still in the estate. Given CAT is in play, it appears it would be but that would need to be confirmed

barneystinson · 21-04-2021 1:04pm

It seems from what you have posted that the property is to be sold by the executor and the proceeds will be distributed to you (and possibly others).

The value that is used for probate purposes is important and could result in unnecessary tax liability within the administration of the estate if it is understated. The effect of that is to reduce the distributions to beneficiaries.

This is best illustrated by an example.

Say the property is valued at 500k for probate, then put on the market and the executor sells it 6 months later for 550k. There will be CGT due of 16,500, being (550k - 500k) x 33%.
Ignoring expenses of sale etc, this would leave 533,500 for distribution to the beneficiaries.
If the property was valued at 550k/600k for probate, there would be no CGT liability and there would be an additional 16,500 to distribute to the beneficiaries.

hold my beer · 21-04-2021 3:25pm

barneystinson wrote: »

If the property was valued at 550k/600k for probate, there would be no CGT liability and there would be an additional 16,500 to distribute to the beneficiaries.

There'd be an additional CAT liability if the property is valued at 550k/600k on the IT38.

DmanDmythDledge · 21-04-2021 5:52pm

hold my beer wrote: »

There'd be an additional CAT liability if the property is valued at 550k/600k on the IT38.

There's no CAT liability on the property if sold whilst still in the estate - CAT would be payable on the cash distributed after sale of house and CGT paid by the estate.

Having read the OPs post again, there seems to be ambiguity as to whether he is inheriting the house and it is then being sold once the estate matters have been finalised or if it is being sold whilst still held by the estate.

Xofpod · 21-04-2021 5:58pm

A more basic question I have is exactly what part of the proceeds of the sale of an inherited house is liable for CGT? I understand the inheritance/CAT part of it but am flummoxed by the CGT element. Is (CGT) tax liable only on any increase in value between the date of inheritance and the date of sale?

hold my beer · 21-04-2021 6:03pm

DmanDmythDledge wrote: »

There's no CAT liability on the property if sold whilst still in the estate - CAT would be payable on the cash distributed after sale of house and CGT paid by the estate.

Having read the OPs post again, there seems to be ambiguity as to whether he is inheriting the house and it is then being sold once the estate matters have been finalised or if it is being sold whilst still held by the estate.

I deleted my last post after reading your post again. Your first sentence is only true if there's an instruction to sell in the Will (which is rare enough in my experience). Otherwise the OP is inheriting a house, which they are then choosing to sell. So CAT is payable on the value of the house on the valuation date.

hold my beer · 21-04-2021 6:05pm

Xofpod wrote: »

A more basic question I have is exactly what part of the proceeds of the sale of an inherited house is liable for CGT? I understand the inheritance/CAT part of it but am flummoxed by the CGT element. Is (CGT) tax liable only on any increase in value between the date of inheritance and the date of sale?

Yes exactly.

barneystinson · 22-04-2021 12:21pm

OP needs to be clearer on what the actual position is, or the answers they get are of no use.

If they inherited the house, then Hold My Beer's answer is correct.

My answer was based on the will providing for sale of the house with some / all proceeds going to the OP. I took that approach because of the OP's reference to CGT exemption and "executor's sale", although looking at it again now it seems more likely they inherited the house.

sector_000 · 23-04-2021 3:18pm

Thanks for all the contributions above. As this is my first personal inheritance experience, I'll see if I can explain the situation better.

My last surviving parent died earlier this year.
The Will states all assets & property are to be converted into cash and distributed in equal shares amongst the "kids".

"....I leave devise & bequeath the rest, residue and remained to my property of every nature and kind..... to my Executors & Trustees upon trust to convert same into cash and to distribute the proceeds of said conversion in equal shares amongst my children."

So using round numbers.... assume
- house value €500K
- cash/liquid assets €300K
- 2 "Kids".
That implies €400K per kid (less various costs).

When the house will actually be sold is unclear to me (not sure who determines that, although I am one of 2 executors).... but let's assume it's next year (it could be longer if other "kids" drag it out). Solicitor believes that the Estate Agent's assigned house value might be a bit low. He could be right - I have no specific insight to deviate from the Estate Agent's valuation.

My primary concern is not to pay any tax for which I am not 99% assured to receive the relevant benefit.
My secondary concern is to minimise tax liability.

If the house does in fact sell for €500K.... I presume the tax would be purely CAT at 33% above the child allowance:
[((500+300)/2)-335 ] * 33% = ~€21.5K tax

If the house sells for only €400K.... I fear the CAT liability would be based on the initial valuation of €500K, i.e. 33% of:
[((500+300)/2)-335 ] * 33% = ~€21.5K tax
Would there be any rebate of CAT due to the lower sale price?

If the house sells for €600K.... I presume the tax would be a combo of CAT and CGT... both at 33% and factoring in the CAT allowance:
[((600+300)/2)-335 ] * 33% = ~€38K tax
Would there be a €1,270 Capital Gain allowance in the above case?

Which way minimises risk & hassle, and is tax efficient?

DmanDmythDledge · 23-04-2021 5:50pm

The Will seems to imply a trust has been created? If it is a discretionary trust that could cause further complications and additional tax liabilities - trusts are not an efficient form of tax planning (despite the idiotic headline in the Irish Times this week...). There's a million and one different things to analyse and consider now and you won't get clarity on the answer you need from here. You should engage a decent tax consultant - not a solicitor or small accountant who wing tax advice.

If a trust has not been created, be it previously or by the Will, then the estate would pay CGT on any uplift in value of the property between date of death and date of sale and you would liable to CAT on cash proceeds received (less available thresholds etc)

barneystinson · 23-04-2021 10:08pm

sector_000 wrote: »

Thanks for all the contributions above. As this is my first personal inheritance experience, I'll see if I can explain the situation better.

My last surviving parent died earlier this year.
The Will states all assets & property are to be converted into cash and distributed in equal shares amongst the "kids".

"....I leave devise & bequeath the rest, residue and remained to my property of every nature and kind..... to my Executors & Trustees upon trust to convert same into cash and to distribute the proceeds of said conversion in equal shares amongst my children."

So using round numbers.... assume
- house value €500K
- cash/liquid assets €300K
- 2 "Kids".
That implies €400K per kid (less various costs).

When the house will actually be sold is unclear to me (not sure who determines that, although I am one of 2 executors).... but let's assume it's next year (it could be longer if other "kids" drag it out). Solicitor believes that the Estate Agent's assigned house value might be a bit low. He could be right - I have no specific insight to deviate from the Estate Agent's valuation.

My primary concern is not to pay any tax for which I am not 99% assured to receive the relevant benefit.
My secondary concern is to minimise tax liability.

If the house does in fact sell for €500K.... I presume the tax would be purely CAT at 33% above the child allowance:
[((500+300)/2)-335 ] * 33% = ~€21.5K tax

If the house sells for only €400K.... I fear the CAT liability would be based on the initial valuation of €500K, i.e. 33% of:
[((500+300)/2)-335 ] * 33% = ~€21.5K tax
Would there be any rebate of CAT due to the lower sale price?

If the house sells for €600K.... I presume the tax would be a combo of CAT and CGT... both at 33% and factoring in the CAT allowance:
[((600+300)/2)-335 ] * 33% = ~€38K tax
Would there be a €1,270 Capital Gain allowance in the above case?

Which way minimises risk & hassle, and is tax efficient?

Ok you have now clarified that the position is as I believed when I responded to your OP.

See my reply at post 4 above, that explains why the solicitor is concerned about the valuation being on the low side.

If probate has already been extracted that horse has already bolted as you won't be able to easily revisit the valuation, unless it was waaaaay off the mark, it being a little bit on the conservative side doesn't mean it is fundamentally erroneous.

sector_000 · 24-04-2021 1:15am

barneystinson wrote: »

See my reply at post 4 above, that explains why the solicitor is concerned about the valuation being on the low side.

I must be missing something. I just don't comprehend the concern you raise in post4. I truly appreciate your patience.

Compared to the baseline case of:
- house value €500K
- cash/liquid assets €300K
- 2 "Kids".
That implies €400K per kid (less various costs).... which after CAT means €378K each.

Do you mean that if the house were to sell for €100K more than the probate valuation, the Estate would be charged 33% CGT on that €100K uplift, meaning only a net extra €67K left to the Estate.... and would each of the "kids" then be charged a further 33% CAT on that €67K, leaving on a total net gain for disbursement of only €44.9K?

Whereas if the house had actually been valued at €600K, there would be a net gain for disbursement based only on CAT, resulting in €67K extra compared to the baseline?

Is that correct??

That strikes me as double taxation! Please tell me Revenue are not into double taxation?

(well I guess we have VAT on VRT or vice-versa... so maybe not)

barneystinson · 24-04-2021 1:33am

sector_000 wrote: »

I must be missing something. I just don't comprehend the concern you raise in post4. I truly appreciate your patience.

Compared to the baseline case of:
- house value €500K
- cash/liquid assets €300K
- 2 "Kids".
That implies €400K per kid (less various costs).... which after CAT means €378K each.

Do you mean that if the house were to sell for €100K more than the probate valuation, the Estate would be charged 33% CGT on that €100K uplift, meaning only a net extra €67K left to the Estate.... and would each of the "kids" then be charged a further 33% CAT on that €67K, leaving on a total net gain for disbursement of only €44.9K?

Whereas if the house had actually been valued at €600K, there would be a net gain for disbursement based only on CAT, resulting in €67K extra compared to the baseline?

Is that correct??

That strikes me as double taxation! Please tell me Revenue are not into double taxation?

(well I guess we have VAT on VRT or vice-versa... so maybe not)

You might choose to call it double taxation but that doesn't make it so.

What if there was disagreement among the executors, or issues with title of the property, or god knows what else, as a result of which the property doesn't sell for 10 years. By that time the land has been rezoned and the property sells for 2m.

Now, the will states that the property is to be sold and that the inheritance you receive is the proceeds of that disposal. So how could your inheritance be anything other than that 2m (net of costs / taxes arising on sale)? Your liability to tax, and your obligation to pay that tax, can only crystallise at that future time. So in that scenario you owe over 500k in CAT.

Separate entirely from you, and from your deceased parent, is the estate of your parent. That is its own entity, and the executors are accountable for the tax arising on any income or gains arising during the administration of the estate.

Let's say, the executors simply decided not to sell the property, and let it sit there within the estate appreciating in value for ten years. Why should that gain not be subject to CGT, in accordance with how CGT works generally in relation to property?

sector_000 · 26-04-2021 6:13pm

barneystinson wrote: »

You might choose to call it double taxation but that doesn't make it so.

What if there was disagreement among the executors, or issues with title of the property, or god knows what else, as a result of which the property doesn't sell for 10 years. By that time the land has been rezoned and the property sells for 2m.

Now, the will states that the property is to be sold and that the inheritance you receive is the proceeds of that disposal. So how could your inheritance be anything other than that 2m (net of costs / taxes arising on sale)? Your liability to tax, and your obligation to pay that tax, can only crystallise at that future time. So in that scenario you owe over 500k in CAT.

Separate entirely from you, and from your deceased parent, is the estate of your parent. That is its own entity, and the executors are accountable for the tax arising on any income or gains arising during the administration of the estate.

Let's say, the executors simply decided not to sell the property, and let it sit there within the estate appreciating in value for ten years. Why should that gain not be subject to CGT, in accordance with how CGT works generally in relation to property?

If parent's assets are e.g. in entirety: €335K in cash and house valued at €1M... and we'll just say there's one kid, me (as this might make all the numbers easier).

So with CAT allowance of €335K, and 33% on balance....
if the house sells for €1M, does that mean the total tax liability is €330K?

If for whatever reason the house only sells for half that, am I still stuck with a tax liability of €330K?

Alternatively, if the house sells for €2M, do I get a full extra €670K after all taxes?

hold my beer · 26-04-2021 7:05pm

sector_000 wrote: »

If parent's assets are e.g. in entirety: €335K in cash and house valued at €1M... and we'll just say there's one kid, me (as this might make all the numbers easier).

So with CAT allowance of €335K, and 33% on balance....
if the house sells for €1M, does that mean the total tax liability is €330K?

If for whatever reason the house only sells for half that, am I still stuck with a tax liability of €330K?

Alternatively, if the house sells for €2M, do I get a full extra €670K after all taxes?

It depends on whether the Will has an instruction to sell the property.

If it does have instruction to sell, and the house fetches 1m, you are inheriting 1.335m. Less the 335k threshold and 33% CAT = 330k.

If the Will does not include instruction to sell then you are inheriting a house and 335k. The decision to sell (or not) is made after the inheritance. The valuation of the property for Probate will be the value assessed for CAT. If you subsequently decide to sell the property, and it sells for more than the Probate valuation, you will be liable for CGT on the gain when you sell. If it sells for less, you'll have a capital loss to carry forward. So it's important to get the house sold as quick as possible.

beauf · 26-04-2021 8:17pm

One issue is the market can rise or fall a lot between valuation for probate and sale and its hard to know the value if nothing similar has been sold for a while in the area.

So you might be out by quite a lot in some cases. I've been told different stories about sending in an adjustment.

sector_000 · 27-04-2021 12:04pm

beauf wrote: »

I've been told different stories about sending in an adjustment.

Can you expand on what do you mean by that?

Your earlier point is the exact kernel of my concern.
I just want to pay the fair level of tax... but not be landed with a tax liability without realising the relevant associated gain.

Many people must have been totally screwed by Wills with property sales based on valuations in 2008 and then attempting to sell in 2009!

sector_000 · 27-04-2021 12:14pm

hold my beer wrote: »

It depends on whether the Will has an instruction to sell the property.

If it does have instruction to sell, and the house fetches 1m, you are inheriting 1.335m. Less the 335k threshold and 33% CAT = 330k.

If the Will does not include instruction to sell then you are inheriting a house and 335k. The decision to sell (or not) is made after the inheritance. The valuation of the property for Probate will be the value assessed for CAT. If you subsequently decide to sell the property, and it sells for more than the Probate valuation, you will be liable for CGT on the gain when you sell. If it sells for less, you'll have a capital loss to carry forward. So it's important to get the house sold as quick as possible.

The Will appears to me to imply a sale.

"....I leave devise & bequeath the rest, residue and remainder of my property of every nature and kind..... to convert same into cash and to distribute the proceeds of said conversion in equal shares amongst my children."

So is CAT based purely on the actual sale price of the house?
Where does the Estate Agents valuation come into it then?

DmanDmythDledge · 27-04-2021 12:39pm

Estate agent valuation relevant for CGT base cost for sale by the estate

What's subject to CAT is the cash you receive from the estate - forget about sales proceeds because that seems to be sending you in circles

There's a few people in this thread that understand what's going on but a few that don't which is making things hard to follow for you. I don't think much more can be said here apart from getting professional advice to make sure things are done properly

hold my beer · 27-04-2021 2:00pm

sector_000 wrote: »

The Will appears to me to imply a sale.

"....I leave devise & bequeath the rest, residue and remainder of my property of every nature and kind..... to convert same into cash and to distribute the proceeds of said conversion in equal shares amongst my children."

So is CAT based purely on the actual sale price of the house?
Where does the Estate Agents valuation come into it then?

The Will does seem to imply that. You should get professional advice.

beauf · 27-04-2021 2:04pm

sector_000 wrote: »

Can you expand on what do you mean by that?

Your earlier point is the exact kernel of my concern.
I just want to pay the fair level of tax... but not be landed with a tax liability without realising the relevant associated gain.

Many people must have been totally screwed by Wills with property sales based on valuations in 2008 and then attempting to sell in 2009!

I was told by different accountants that you can't adjust\appeal the valuation afterwards and some that you can. Which isn't helped when Estate agent valuations including so called "red book" can vary quite a bit.

At the end of the day if there's tax due you just have to pay it. Have a clear plan and if you intend selling, then sell don't dither and tie yourself in knots. I found the tax office to be very helpful and understanding. If you are getting a large some then paying someone for professional advice, and services I think its well worth the piece of mind.

DmanDmythDledge · 27-04-2021 2:29pm

Revenue can query any professional valuation by obtaining their own if they doubt the accuracy of it

barneystinson · 27-04-2021 3:49pm

beauf wrote: »

I was told by different accountants that you can't adjust\appeal the valuation afterwards and some that you can. Which isn't helped when Estate agent valuations including so called "red book" can vary quite a bit.

At the end of the day if there's tax due you just have to pay it. Have a clear plan and if you intend selling, then sell don't dither and tie yourself in knots. I found the tax office to be very helpful and understanding. If you are getting a large some then paying someone for professional advice, and services I think its well worth the piece of mind.

You cannot revisit a value on an inland revenue affidavit unless the original figure is demonstrably erroneous / flawed. Revenue are very sticky on this.

For example, if you have a valuation from a competent professional at €500k expressing an opinion as to value, the fact that it sells for €600k (or indeed €400k) 6 months later is not evidence that the valuation was erroneous.

If the subject of the valuation was something a bit more like a commodity, eg. a big standard house in an estate where a pretty identical unit sold around the time of the valuation, for a materially different sum, and the valuer ignored that transaction in forming his opinion, that might be considered evidence of a material error.

beauf · 27-04-2021 4:39pm

I don't disagree.

But its a difficulty all the same, (just not a difficulty for revenue).

Valuations are far from an exact science, especially if there little recent data for context.

Inheritance tax - CAT vs CGT

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