As existing clients of Capital Options are aware, our primary goal is to protect and grow our clients’ capital. The purpose of this article is to set out some scenarios where we can help individuals or families to preserve their wealth through long-term financial planning which is the very essence of managing wealth.
A pension plan is not merely a retirement planning tool; it can be the cornerstone of an individual’s wealth planning strategy. If an investor is willing to put €60 aside, the State will give him or her an additional €40, allowing €100 to be invested on a tax-free basis. The earlier an individual starts their pension and the more they contribute, the greater the potential value of their plan in later years. This point is crucial as it is through the power of tax-free compounding that a pension becomes a powerful wealth planning tool.
In order for compounding to have a material effect, the investment and the planning must be long-term in nature. Our role is to ensure that the pension structure and retirement strategy are maximised in a transparent manner that involves client engagement and agreement at all times to ensure the underlying pension funds are managed prudently based on the clients’ risk tolerance profile and investment objective. For investors who buy into this approach, this strategy is far more likely to lead to the desired outcome and most importantly, a larger retirement fund.
On the surface it can seem like a very minor point to refer to a €3,000 annual small gift exemption in the context of a person’s overall wealth. Nonetheless, the Small Gift Exemption can be a useful tool for any individual seeking to maximise their wealth planning options.
An obvious example would be grandparents who transfer €3,000 each to their son, daughter-in-law, and three grandchildren. This would add up to €15,000 per grandparent and a total of €30,000 per annum. Assuming that the maximum lifetime tax-free thresholds of the son (€280,000), daughter-in-law (€15,075) and each grandchild (€30,150) will be utilised in the future, such advanced financial planning can save a family approximately €10,000 per annum in tax based on the current 33% rate of Capital Acquisitions Tax. However, it is vital to note that the Small Gift Exemption is a ‘per annum’ amount. Once a calendar year has passed, the ability to transfer €3,000 for that year is lost. Parents and grandparents should not prejudice their own positions by gifting excessively; only surplus monies should be distributed, and only when the effect that such monies might have on the next generation has been considered.
Section 72 Life Insurance Policies
Parents who are open to the idea of long-term inheritance tax planning should also consider taking out a Section 72 life insurance policy, the proceeds of which may be used to mitigate their children’s inheritance tax liability. The advantage of such a policy is that its proceeds do not constitute a taxable inheritance in their own right. The policy would be especially useful in circumstances where there are significant assets within a family, but a lack of liquid assets. This is a common scenario, given the level of Irish wealth that remains invested in property.
The salient point is that similar to any other form of life cover, the cost of taking out such a policy increases with age. Long-term planning can therefore help to maximise a family’s wealth, both in terms of a cheaper premium at the outset and a reduction in Capital Acquisitions Tax in the longer-term.
Dwelling Home Exemption
On a larger scale, the dwelling house exemption presents a significant opportunity for efficient inter-generational wealth transfer. However, it too can require advanced planning. In summary, it provides for the transfer of a residential property by way of gift or inheritance tax-free, subject to a number conditions including:
- It is the principle private residence of the beneficiary (the person receiving the gift)
- The beneficiary had been living in the home for the 3 years prior to the transfer
- The beneficiary does not have an interest in any other residential property
- The beneficiary continues to occupy the house as his/her main residence for a period of 6 years commencing on the date of gift/inheritance.
The relief will be withdrawn if:
- The beneficiary disposes of the home within 6 years of the gift/inheritance
- The beneficiary no longer uses the property as his/her main residence within the 6 years of gift/inheritance.
Capital Options main aim is to improve our clients’ financial future through the delivery of robust and high quality investment and financial planning solutions. If you would like to discuss our approach in greater detail and explore how Capital Options could be of assistance to you and your family, please do not hesitate to contact us on 01 237 4643 or email [email protected]
This article has been written with the assistance of Andrew Fahy, Investec Wealth & Investments who is a Chartered Tax Adviser and Chartered Accountant. The information contained in this document is based on current tax legislation, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any people acting on the information contained within this document do so at their own risk. We recommend you contact Capital Options for professional advice. All rights reserved.