Arriving at the Taxable Value

06 June 2024

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From time to time one comes across the following provision in a will

I GIVE DEVISE AND BEQUEATH my house at 34 Oakland Mews to my daughter Sarah subject to the payment of my funeral and testamentary expenses and subject to the payment to my son Sean of the sum of €40,000.

Often in these cases it can be that the beneficiary focuses on the expenses rather than the inheritances. This is particularly so where the beneficiary does not have the funds available to pay the expenses and the other payment obligations.

Tax Consequences of Obligations to Pay

However, there is one solace to a beneficiary who feels somewhat disappointed in these cases, is that the items that are due to the paid out of the benefit do serve to limit the tax liability of the beneficiary.

This arises under s. 28 of the Capital Acquisitions Tax Consolidation Act 2023. It is through this provision that the above bequest should be analysed for tax purposes.

Firstly the section indicates that you are allowed to deduct from a an inheritance “liabilities, costs and expenses that are properly payable out of the taxable gift or taxable inheritance”. It is generally accepted that funeral expenses and legal expenses of the estate are allowable in this circumstance. What is not allowable would be liabilities guaranteed by a third party or a liability which may be payable because of “moral obligation” rather than a clear enforceable liability. A further deduction would be any mortgage that the property is subject. All of these deductions allows one to obtain the “incumbrance free value”.

In the example above, there is an obligation by the beneficiary to pay a third party a sum from the benefit. This is classed as “consideration” for the benefit and is dealt with under s. 28(2) of CATCA. In this case the consideration is passing to a third party. However, consideration can move from the disponer to the disponee. So, if for example a father gifted a child a new car worth €50,000 subject to the payment of €5000 from the child to the father, then, that consideration is deductable from the value of the benefit and the child is deemed to receive a benefit of €45,000.

From the incumbrance free value you deduct any consideration payable to arrive at the taxable value. It is on the taxable value that tax is paid.

Practical Considerations

These sums while a cashflow difficulty for a beneficiary may be of such a nature as to limit the tax exposure of a beneficiary on receipt of a benefit. So the taxable value after taking into account the above expenses and consideration may be such as to bring the taxable value below the class threshold and thus alliviating any obligation to pay tax. That may or may not be any consolation to a beneficiary who is without any cashflow to pay the expenses and consideration.

It is helpful that there are these rules that provide some leeway to a beneficiary that must fund expenses from a benefit, the practical question arises as to how a beneficiary would fund these benefits. A beneficiary may be able to raise funds through borrowings. They may obtain gifts to pay the benefits, (although it should be noted however that those gifts are subject to CAT in the normal course). Alternatively, they may be left with no option but to sell the asset to realise funds to pay the sums charged. It is generally advisable to discuss these elements with a testator at the time of will drafting to highlight to them that a probable result of placing consideration obligations on assets will have the natural consequence that the asset must be sold, something that a testator may not wish to occur.

Hope this helps and if you have any tax, will drafting or probate issues please email me on colm@theprobatehub.ie