Tis the season for giving

As the saying goes “it is better to give than receive”, with people in a festive and generous mood it seems like the perfect time to review the rules around gifting and the gift tax implications.

In recent years this is an area which the government have been monitoring very closely. Back in 2015 a number of changes were introduced to ensure that any financial assistance given by a parent to their adult children would in fact be liable for gift tax. One of the main changes was around the area of financial assistance for Education.
Previously, any money paid by a parent for the support, maintenance or education of their children, regardless of age, would not trigger a tax bill. However, since 2015 this is now changed and only children under the age of 18 or those in full-time education under the age of 25 will be exempt from tax on such payments.
The Government took this step because of concerns that this exemption was being abused by wealthy individuals passing on large gifts to adult children. At a rate of 33%, Capital Acquisitions Tax can eat up a sizeable chunk of any gift or inheritance received. At more than three times the international average, Irelands Inheritance tax & gift tax rates are amongst the highest in the world

Despite the introduction of these changes and the tightening of these rules it is still possible to pass assets in a tax efficient manner but it is now more important than ever to familiarise yourself with all reliefs available. Below is I have covered some of the issues which should be taken into consideration when considering succession planning.

Always utilise the annual small gift exemption

CAT/Gift Tax legislation allows for an exemption for the first €3,000 of any gift taken by a beneficiary from any one donor. This is an annual exemption, which means that a beneficiary can receive up to €3,000 tax free in any one year from any donor, or even multiple donors and this gift will not impact their tax free threshold for Inheritance.
One practical application of this is where parents, grandparents, aunts and uncles gift money to children. Each adult can gift each child up to €3,000 in any year with no tax liability for the child and without reducing the amount the child can ultimately inherit tax free.
For example, each grandparent could gift €3,000 pa to a grandchild thus enabling them to gift €60,000 over a 10 year period completely tax free. This €60,000 would not impact the grandchild’s tax free Inheritance threshold of €30,150 and could result in a potential Tax saving of €19,800.
A key element of this is that the ownership of the money comprising the gift has to clearly pass to the beneficiary, i.e. into a bank account in the beneficiaries’ name.

This €3,000 is an annual exemption so it is a case of “use it or lose it”, you cannot retrospectively make the gift. As with all elements of succession planning, the earlier you can introduce this type of plan the more tax efficient it will be in the long run

Use the lifetime thresholds

Currently the Category A threshold which deals with gifts/Inheritances between parent & child is set at €310,000, this is the maximum amount that a child can receive tax free from a parent throughout their lifetime. Where the value of an inheritance or gift is more than €310,000, the child will have to pay 33% tax on the balance over €310,000.
The small gift exemption of €3,000 a year mentioned above does not impact the €310,000 limit. Therefore, if you were to utilise the small gift exemption and give gifts of €3,000 a year to a son or daughter over 20 years while you are alive, and then leave them a property worth €310,000 when you die, he or she would be able to get tax-free gifts and inheritances worth €370,000 in total from you.

Section 72 Policies

These are a special type of life insurance policy which can be taken out by a parent or child to cover a potential future Inheritance Tax bill. The proceeds of this policy are exempt from inheritance tax provided they are used to pay an inheritance tax bill that arises after you die. Any proceeds used for other reasons are liable for tax. This is a very useful cost effective way of reducing or even eliminating an Inheritance Tax bill.

Dwelling house Exemption

Since Jan 2017 the rules regarding dwelling house relief have tightened considerably for fear that it was being exploited by the wealthy to pass property to their children Tax free. From now on, the exemption will only be granted to family members who genuinely live with and care for elderly parents, they will in turn be able to inherit the family home tax free.

All of these reliefs when used as part of a co-ordinated Succession plan over a period of time can significantly reduce any potential Tax bill which might be incurred.

Barry Kerr BBS QFA CFP® is the owner of Wealthwise Financial Planning, Bridge St, Carrick on Shannon, www.wealthwise.ie. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.