Despite a number of changes in recent years it is still possible to pass assets and gifts to your loved ones in a tax efficient manner
2020 has been a very tough year for many people but Christmas is nearly upon us and 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 highlight the rules around gifting money and how to address any possible tax implications.
Despite a number of changes in recent years it is still possible to pass assets and gifts to your loved ones in a tax efficient manner.
Here I have covered some of the issues which should always be taken into consideration when designing a succession plan.
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 €335,000, 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 €335,000, the child will have to pay 33% tax on the balance over €335,000.
The small gift exemption of €3,000 a year mentioned above does not impact the €335,000 Category A 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 €335,000 when you die, he or she would be able to get tax-free gifts and inheritances worth €395,000 in total from you.
Section 72 Policies
These are a specific type of life insurance policy which can be taken out by a parent or child to cover any 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 is Managing Director of Wealthwise Financial Planning who are based in Block C, Hartley Business Park, Carrick on Shannon. 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. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland #CI6614