Money Mentor: will living in the UK affect my inheritance?

Question: I’ve been living in the UK for a few years now, working in my first job since graduating from university. My parents own a 100ac farm in Mayo, which I’m planning to take over once I secure a job back in Ireland. I’m an only child and thought I had a good understanding of how agricultural relief works in my situation.

However, with all the recent updates and changes, I’m no longer feeling confident. I’m a bit confused about my obligations and how these changes might impact my future plans. My mother is a teacher outside of her work on the farm and I’m also not sure if that has an impact on my situation or not. What do I need to know?

Answer: As a young professional working in the UK, but considering a return to Ireland to take over the family farm, it’s understandable that the path ahead might seem tangled with tax complexities. It has its twists, but it can be navigated.

With Ireland’s Capital Acquisitions Tax (CAT) rules and the proposed shift in the UK’s Inheritance Tax (IHT) system, knowing who gets taxed and why is key to planning your next steps. Let’s look at each.

Irish agricultural relief

Ireland’s agricultural relief remains a cornerstone for making farm inheritances manageable. This relief cuts the taxable value of the land by 90%, which makes a huge difference when calculating Capital Acquisitions Tax (CAT).

Be aware though, when you inherit a farm, your eligibility for this relief comes with conditions. You must keep at least 80% of your assets agricultural in nature and you’ll have to either farm, or lease the land for farming, for at least six years. You’ll be glad to know that your mother’s job as a teacher doesn’t affect this relief – this has been recently clarified. You qualify based on your own farming intentions and asset composition.

UK Inheritance Tax (IHT)

At the moment, UK IHT hinges on domicile, which is the country in which you intend to live permanently. If your parents are domiciled in Ireland, only their UK-based assets face UK Inheritance Tax.

Come April 2025, however, the UK plans to switch to a residence-based system. This means if a person has been a UK resident for 10 years or more, their global assets could be taxed under UK IHT, even if that asset is a family farm in Mayo. This is only a concern if your parents have ever been long-term UK residents.

Let’s look at another scenario that you won’t want to think about, but should know about. If your parents pass away while you’re working in the UK, only their residency and domicile status determine the UK IHT exposure. If they remain Irish-domiciled and haven’t been long-term UK residents, their estate won’t be caught by UK IHT. The good news is that, as the recipient, your own UK residency status won’t change that.

The seven-year rule

A popular strategy to sidestep future IHT issues is what’s called a lifetime transfer. If your parents gift you the farm now and live for at least seven more years, the farm won’t be included in their estate for UK IHT purposes, even if they’ve ever been long-term UK residents. This strategy can be especially smart if they have other assets that could complicate the 80% agricultural asset test needed for Irish CAT relief.

Cross-border tax relief

If you’re worried about double taxation, the Irish-UK Double Taxation Convention should offer you some peace of mind. If you pay Irish CAT, that can be credited against any potential UK IHT, ensuring you’re not taxed twice on the same land.

Where to go from here?

Understanding who is taxed and when can save a lot of hassle and, of course, money. If your parents have never been UK residents for 10 years or more, then under both current and proposed rules, their estate (including the Mayo farm) won’t face UK IHT.

However, with cross-border rules and future UK changes looming, sitting down with a tax adviser who understands both sides would be a wise move. It’s about securing the future of that family farmland and making the transition to you as smooth as possible.

Marty Murphy is head of tax with Ifac, which is the professional services firm for farming, food and agribusiness.