Small Gift Exemption to transfer wealth tax efficiently

The current rate of Capital Acquisition Tax of 33% is applied to inheritances and gifts above the thresholds broadly outlined below.

 

€335,000 (Group 1) – Child

€32,500 (Group 2) – Brother, sister, niece, nephew, parent

€16,250 (Group 3) – Stranger

 

Keeping all of your wealth and assets until you die might not be the best course of action for families in Ireland. Gifting wealth to children or other dependents now may improve everyone’s ability to safeguard family wealth, reduce future exposure to CAT and assist family members when it might be most beneficial.

 

Irish legislation governing Capital Acquisitions Tax/Gift Tax exempts the first €3,000 of any gift received by a beneficiary from any one donor.

 

Since this is an annual exemption, a beneficiary may receive up to €3,000 tax-free from any donor, or even from several donors, in a single year without it having any bearing on their lifelong CAT threshold exemptions from inheritance taxes.

 

This is called the ‘Small Gift Exemption’ and it’s a particularly beneficial relief that enables persons to decrease their assets without affecting the recipient’s inheritance tax threshold amount and permits anyone to give anyone else up to €3,000 without any tax repercussions for either party within any given calendar year.

 

If used early enough, the small gift exemption can have a significant impact over time, allowing transfer of wealth to happen incrementally.

 

Again, the tax burden of inheritance on the remaining estate is unaffected by these exempt gifts because they are not considered for determining whether the tax-free threshold has been reached.

How is the small gift exemption being used?

 

To give their children and grandchildren a head start in life and to potentially decrease their future exposure to CAT, parents and grandparents are using the small gift exemption more frequently. It might be used to pay for childcare expenses, third level education or to act as a deposit for a house, for example.

 

As life expectancy increases and the following generation reaches middle age before inheritance becomes possible, this practice of gifting annually is especially significant.

 

Again, the same €3,000 exemption can be used for gifts received from several people as well. As a result, parents and grandparents may annually give each child or grandchild (or other individual) up to €6,000 (as a couple).

 

Gifting a child annually could be done via a bare trust arrangement, assigned investment policy or simply a bank account in the child’s name and with the transfer from doners marked ‘small gift exemption’. When grandparents gift in this way it will not count against the grandchild’s Group 2 Threshold for example.

 

Recently MOJO Finance spoke with a couple in their 50s and with 2 children in their late adolescence. The couple expected both children to inherit above the €335k threshold perhaps 30+ years down the line. The couple wanted to begin the process of transferring €6,000 annually to an investment account for each child. This outlay was also not affecting the couple’s ability to fund their own pensions and prioritise funding their own retirement.

 

Were €6,000 invested annually for each child for 30 years at 6% – that €180,000 invested would be worth over €500k to each child and their CAT exposure would also be reduced significantly. More likely though, €60,000 accumulated for each child over 10 years will be used to fund a house deposit.

A more extreme yet not totally uncommon example of how the small gift exemption can be used is as follows:

 

An elderly couple with a large amount of assets and with four children and six grandchildren could gift €3,000 each annually (€6,000 as a couple) to each of their children and grandchildren. That would amount to €60,000 annually and €300,000 over 5 years, potentially resulting in a considerable reduction in CAT exposure and assuming they have a large amount of assets.

 

These are just some examples of how the small gift exemption is being used in Ireland and as part of an overall inheritance plan.

 

There are also many ways where people use the small gift exemption incorrectly and inadvertently risk falling foul of the Revenue rules as they relate to CAT.

 

To avoid this, I would suggest speaking with your financial advisor and keeping in mind that the key requirement of the Revenue Commissioners is that the benefit of the exemption applies specifically to the person receiving it.

 

Correctly planned, the small gift exemption can be used effectively and, in many ways, to help parents and grandparents distribute their wealth while they are still living and support their family when they may need it most.

 

If you wish to discuss further how you can effectively avail of the small gift exemption, then please feel free to book a General Consultation with MOJO Finance.

Small Gift Exemption to transfer wealth tax efficiently