I am widowed and living alone in the house I own. I have three children.
I made a will after my husband’s death and apart from small bequests to grandchildren and charities, I left the balance in equal shares to my three children.
Circumstances for two of my children have changed in recent years and I would prefer to draw up a will more in their favour but still wish to name the other child, who has lived abroad for many years, in my will also.
My solicitor tells me this will create a tax problem for my daughter who lives abroad but was unable to elaborate on the extent of said problem. I don’t know where to go for information. I would appreciate advice please and some hard facts!
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Ms F.J.
Frankly, to put it at its most generous, the position of your solicitor is unhelpful. I do understand that solicitors are wary of being confused with tax advisers. However, if they are going to put the wind up elderly clients, they really need to give some detail or refer the person to a suitable tax adviser.
You’ve done everything by the book to date in making sure you have a will in place. Assuming the bulk of the estate is accounted for by the family home, as it is for most people, it will have to be sold to facilitate the sharing out of the estate to your three children after your death.
Wills are living documents that can often need amendment over time – either to take account of assets that have been acquired or sold, or because of new arrivals, such as children, or deaths of relatives provided for in the will.
The changed circumstances of close family, as in your case, is another common reason why a will would need updating.
Generally, with close family, the default is to divide things equally. Children will have had equal advantage in how they were reared and will hopefully become independent working adults.
However, life does not run evenly. Financial circumstances can change because of the break-up of a long-term relationship or marriage, or ill health affecting a person’s earning ability.
And in those circumstances, it is only natural that a parent would choose to adjust how their estate is divided to provide greater amounts to those in greatest need.
And that’s what you intend to do. You are not a young woman and, despite your apparent good health right now, this is not something that anyone would advise you to long-finger. If you think the will should be changed, the sooner the better.
In those circumstances, it is natural that you would go to your solicitor for their specialist advice in the area. And this is where you have run into an issue.
The solicitor is telling you that changing your will in the way you intend to will create a tax problem for the child who has been living in a foreign country for the past many years. But they cannot or will not provide any further detail of what that problem might be.
This, in my view, is quite simply unacceptable.
I’m not saying it is impossible that there could be some issue arising. Inheritance tax rules do change from one country to another. But I struggle to see what it might be.
And if the solicitor knows there could be an issue, they must be able to provide some detail.
The other thing that concerns me here is that the solicitor has apparently mentioned this same issue (presumably again without detail) to the your foreign-based child. I have no idea of the circumstances here – and you give no detail on whether you are both clients of the same solicitor – but it would not be a good idea for the same solicitor to be representing your interests and those of one of your children in an instance like this where there is potential for conflict of interest.
The real confusion here lies in the advice of the solicitor. Your foreign-based daughter is due to inherit a sum, X, on your death via the equal distribution of your estate (after the small bequests mentioned) under your current well.
If the will is adjusted as you would like, this child will inherit Y, a smaller sum to reflect your desire to provide greater financial support to her siblings given their particular circumstances.
If this smaller sum creates a tax problem for the child living abroad, I do not understand how the bigger sum coming to them under the current will would not create a bigger tax issue in whatever country they are living in.
Inheritance only becomes a tax issue for beneficiaries when you die; it is not dependent on the date a will is drawn up. So if there is a tax issue for the daughter living abroad, it will be an issue regardless of which will is in operation. And logic dictates that the larger the inheritance, the larger the tax issue.
Tax rules
When it comes to capital acquisitions tax (inheritance tax), people need to remember that the Revenue Commissioners will consider the inheritance liable to Irish inheritance tax rules if either the disposer (in this case, you) or the intended beneficiaries lives in the State. The same applies even if neither party lives here but the property in question is here, though that’s not relevant here.
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As you live and are tax resident in Ireland, Revenue will consider any inheritance from your estate assessable under Irish tax rules – with a €400,000 tax-free exemption for any child and a tax rate of 33 per cent thereafter.
Ireland has tax treaties with many countries to ensure that people are not subject to double taxation – in Ireland and under the tax rules of whatever country they are living in. Normally, this operates by allowing a tax credit in one jurisdiction for any tax paid in the other.
Different tax treaties cover different taxes. However, in this case, Revenue tells me that the treaty with the country where your daughter lives does not cover inheritance tax.
They do advise that where there is no provision for inheritance tax in a double-taxation agreement, “unilateral relief from double taxation may be available in respect of foreign tax imposed on a gift or inheritance of foreign property that is also subject to CAT in Ireland”.
However, this is of no help to you either because, as Revenue confirms, it applies only to Irish taxation on foreign property. “If the individual inherits Irish property only, then unilateral relief will not be due to them in Ireland,” Revenue adds.
So whatever happens, the daughter based abroad will face an Irish tax bill on any inheritance from you (assuming that between it and anything she received on her father’s death, she inherits assets worth more than the tax-free limit of €400,000).
But what happens on the other side – the country where your daughter lives?
This is where it gets tricky, not least because you do not want me to identify the country, but there are some things we can say.
First, as with most jurisdictions, tax in that country is levied on the beneficiary, not on the estate. However, the overall value of the estate does have a bearing. Essentially, there is a tax-free allowance covering a certain portion of the estate and an additional allowance based on the number of your children – not just those living in that country.
These allowances are modest, certainly by the standards of what a child can expect to receive tax-free in Ireland.
We sometimes whinge about tax-free allowances here based on the examples of what happens in the UK or the US but those are outliers, especially on inheritance tax. Many countries have much more modest allowances for inheritance than we do.
Getting back to your daughter’s long-time country of residence, the rules there on the taxation of assets located outside the country dictate that she is likely to be taxable on anything she receives from you. It does depend on visa and residence status but, on the basis of the limited information I have from you, she seems to be caught.
How much tax she pays is, however, dependent on the amount she receives from you. The country, not unusually, applies a sliding scale where the tax rate increases in line with the assets. That sliding scale starts significantly below the 33 per cent levied here although it does rise to a higher rate for bigger estates.
While the rate is determined by the estate value, not the value of the assets she receives, it is levied only on what she receives. So the lower the inheritance, the lower the tax bill.
Finally, while Ireland will not allow relief against Irish tax in this case, the country your daughter is residing in does allow a tax credit against her tax bill in that country to allow for any tax paid in Ireland.
So, unless your solicitor knows something that goes beyond what I have been able to determine – or your daughter’s status in the country she lives in is somehow irregular – I cannot see how your daughter would face a bigger tax issue on a smaller inheritance simply by virtue of the date on which the will governing your estate is drawn up.
If you want to change your will to help out your children as best you can according to their needs, that is what you should do. If this solicitor is putting blocks in the way of that without any supporting evidence, you should change your solicitor. If you share a solicitor with any beneficiaries, you should go elsewhere for independent legal advice in this case anyway.
That aside, you or your daughter should be able to get accurate advice on any adverse tax implications of them receiving a lower inheritance either from that country’s embassy here or by your daughter going to a tax adviser familiar with local law on foreign inheritance in the country where she lives.
Personally, I cannot see how she would face more punitive tax on a lower inheritance.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com, with a contact phone number. This column is a reader service and is not intended to replace professional advice
