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Foster Children and the calculation of their CAT liability under

By Cheryl Mitchell,2014-05-29 22:11
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Foster Children and the calculation of their CAT liability under

    Foster Childrens Succession Rights and Inheritance Tax

    This summary sets out the legal and tax treatment for foster children who receive an inheritance or gift from a foster parent.

Legal

    On the death of an individual, the division of their estate is effected either according to their express intention as set out in their will or if no will has been made then pursuant to the laws of succession in Ireland.

If a foster parent dies without leaving a will, the foster child is not regarded as “a child”

    of the foster parent for succession right purposes and as such has no entitlement to an

    interest in the estate of the deceased foster parent. Equally, a foster child is not entitled to apply to the courts for provision to be made for him from the deceased’s estate as a 1“child” of the foster parent.

    As a result, the only manner in which a foster parent can ensure that a foster child receives part or the whole of their estate is through the making of a valid will in which the foster child is specifically a named as a beneficiary.

Tax

    If a foster parent dies and in his/her will leaves an inheritance to the foster child, the foster child may be liable to pay Capital Acquisition Tax (“CAT”) on the amount of the

    inheritance above a certain tax free allowance/threshold. The amount of this tax-free allowance for a foster child will vary from the standard ?26,060 (inheritance received from

    a stranger or unrelated party) to ?521,208 (where the foster child qualifies as a “child” of

    the foster parent under special provisions in the tax legislation).

Inheritance Tax Thresholds

    The tax free allowances or thresholds to which a person is entitled are set out in the table below. There are three different groups which depend on the relationship between the person giving and the person receiving the inheritance/gift. Each of these tax free thresholds applies to the total benefits that an individual receives since 5 December 1991 from all persons who fall into that particular relationship group.

Group Relationship of Beneficiary to Lifetime tax 2Disponer/Testator/Intestate Allowance

    A Son/Daughter ?521,208

    B Parent/Brother/Sister/Nephew/Niece/Grandchild ?52,121

    C Any Other Person ?26,060

Historically, a child was defined to mean the biological child of the deceased, however the 3Finance Act 2001 widened the definition of “child” to include a foster children for the

    purposes of qualifying for a group “A tax threshold. Accordingly, a foster child who

    satisfies conditions may be entitled to a group “A tax threshold in respect of gifts and thinheritances received from a foster parent on or after the 6 of December 2000.

    From the above table it will be seen that where a foster child qualifies to be regarded as a “child” they are entitled to claim a larger tax-free allowance. To qualify as a “child” of the

    foster parent, a foster child must satisfy either one of the following two conditions;

     1 S.117 of the Succession Act 1965, 2 As for the calendar year 2008, tax threshold amounts are indexed each year as per the Consumer stPrice Index on January 1 of each year. 3Section 221.

    1. the foster child must have been placed in the foster care of the deceased foster

    parent pursuant to the Child Care (Placement of Children in Foster Care)

    Regulations 1995 (“the 1995 Regulations”), or the Child Care (Placement of

    Children with Relatives) Regulations, 1995,

    or

    2. the foster child must have resided with the deceased foster parent for a period of 4five years before he or she reached 18 years of age (the appropriate period) and

    must have been under the care of and maintained by the foster parent at the

    foster parent’s own expense.

    For Condition 1, the foster child remains eligible even where placed recently in the care of the foster parent under the 1995 Regulations. The 5 year period required to satisfy Condition 2 is not required in placements under the 1995 Regulations. Health Boards currently maintain a list of persons willing and able to act as foster parents as a result the health board may place a child with foster parents listed on such panels and such foster children will qualify under condition 1 above.

    For Condition 2, two independent witnesses must confirm compliance with the above condition. Acceptable witnesses would include individuals such as gardai, doctors, or members of the clergy. It has been noted that foster parents are provided with a fostering allowance in respect of each foster child in their care. The Revenue have confirmed that where foster care payments are received for the care of the foster child during the life time of the foster parent, this will not invalidate a claim for a group “A tax threshold allowance

    by the foster child.

    Where a foster child avails of the group “A tax threshold allowance when receiving a

    gift/inheritance from his/her foster parent, the foster child will retain their group “A tax

    threshold allowance when calculating their CAT liability on receipt of any gift/inheritance from his/her natural parents. The prior gift/inheritance from the foster parent will however be taken into account to determine whether the group “A tax threshold allowance has

    been exceeded. Any excess over the group A tax threshold will be liable to CAT at the

    rate of 20%.

    Example:

In 2007 James received an inheritance of ?400,000 under the will of his deceased foster thparent, Joe Murphy (who had fostered James for more than 5 years prior to James’ 18

    birthday).

James will qualify for the group A tax threshold allowance and as the amount which he

    inherited was below this allowance, no tax will be payable.

    In 2008, James is notified of the death of his natural mother, who died leaving James ?200,000 in her Will. Again James will qualify for the class A tax threshold allowance of

    ?521,208, however James will be liable to CAT at the rate of 20% on the excess only by which the total of the 2 inheritances from his foster parent and natural mother (?600,000)

    exceeds the group “A” tax allowance of ?521,208 (i.e. ?78,792 @ 20% ?15,758.40)

    November, 2008

     The above analysis is confined to current legislation in force and current Revenue practice as at the date hereof and cannot take into account future changes in legislation allowances or practice.

     4 “the appropriate period” means the periods which together comprise at least 5 years falling within the 18 years immediately following the birth of the foster child.

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