Picture the scene – I hope it applies to you today or in the not-too-distant future… You’ve got to that point in your financial life where life is getting easier. Maybe the mortgage is paid off or almost there, and you are finally seeing your savings grow incrementally each year, even though you are doing most of the things that you want to do. You are finally seeing that after a nice holiday or two, socialising as you like and changing the car every couple of years, there is still some money left over.
You may also be at the point where you want to make life a bit easier financially for the people you love and share some of your unused wealth. After all, receiving a few bob early in life always makes life a bit easier, doesn’t it? So, you decide to start gifting. And this is where the taxman starts rubbing his hands…
Unfortunately, in Ireland we have a pretty penal tax environment in this regard. While there are some exemptions as we’ll examine below, Capital Acquisitions Tax (CAT) is charged at a headline rate of 33% to the receiver of gifts and inheritances. The taxman wants one third of the money received.
However there are ways you can reduce the tax, starting with CAT thresholds. The recipient only pays tax on the value of a gift or inheritance above a threshold amount, which is specific to who they receive the money from. This means that the amount of tax you pay depends on your relationship to the donor of the gift or inheritance.
A spouse can receive a gift or inheritance of any amount with no tax liability.
Group A threshold: As a child receiving from a parent, you can receive a cumulative lifetime total of gifts and inheritances from parents of €335,000 without paying tax. Any excess gifts or inheritances above this are liable to tax at 33%. This threshold also applies to stepchildren.
Group B threshold: A more distant relation (e.g. a grandchild, niece & others) can receive again a cumulative lifetime total of gifts and inheritances from donors under this category of €32,500 without paying tax. 33% tax applies above this amount.
Group C threshold: If you are not related under the above groups, you can receive a cumulative lifetime total of gifts and inheritances from all other donors of only €16,250 without paying tax. Any excess gifts or inheritances above this are liable to tax at 33%.
With house prices having soared in recent years and families getting smaller, it doesn’t take long before these thresholds are breached, and tax is payable.
This is where the Small Gits Exemption comes in… along with a little planning and time.
Small Gifts Exemption
As the Revenue set out on their website,” You may receive a gift up to the value of €3,000 from any person in any calendar year without having to pay Capital Acquisitions Tax (CAT). This means that you may take a gift from several people in the same calendar year and the first €3,000 from each disponer is exempt from CAT.” This is called the Small Gifts Exemption, and it is a very valuable tax planning tool. The recipients don’t pay CAT on these gifts and they are not deducted from their CAT Thresholds as outlined above.
So, going back to our article title, how do you give €500,000 to your family tax free?
Brian and Paula are our fortunate couple with rising savings that they want to gift to their 3 children, to make life a bit easier for them with their young families. Brian and Paula also now have 6 grandchildren.
Both Brian and Paula can each give a tax-free gift of €3,000 to each of their children and their grandchildren. This is nine gifts of €3,000 per year from each of them, amounting to a tidy €54,000 gifted each year with no tax liability for the recipients and without biting into the CAT thresholds. Within 10 years, they will have gifted over €500,000 tax free to their family which, hopefully with interest / investment growth will have further increased in value. Small amounts add up.
Are you at that fortunate point of being able to share some of your wealth with your family? If so, the Small Gifts Exemption is a tax planning tool not to be ignored.