With people in a such a festive mood it seems like the perfect time to highlight the rules around gifting and the gift tax implications
At this time of year our thoughts often turn to our loved ones and the topic of what to get them as a gift.
With people in a such a festive mood it seems like the perfect time to highlight the rules around gifting and the gift tax implications.
Despite a number of small changes in some recent Budgets it is still possible to pass assets and gifts to your loved ones in a tax efficient manner. Below I have highlighted some important points to be aware of when considering gifting or passing of assets.
Use the lifetime thresholds
Currently the Category A threshold which deals with gifts/Inheritances between parent & child is set at €335,000, this represents a small Increase of €15,000 in the recent budget.
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 the €335,000 limit, the beneficiary will have to pay 33% tax on the balance over €335,000.
The Category B Threshold which relates to other family members such as brother sister, uncle, aunt, grandparents etc is currently set at €32,500.
Finally, Category C which deals with gifts and inheritances between strangers has a lifetime allowance of just €16,250.
Always utilise the annual small gift exemption
One way to avoid the threshold limits outlined above is to 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 €6,00 pa or €60,000 over a 10 year period completely tax free.
This €60,000 would not impact the grandchild’s tax free Inheritance threshold of €32,500 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.
Section 72 Policies
How can reduce any potential Inheritance tax bill that may be incurred in the future? A section 72 policy is 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. The application process is just like any other type of Life Insurance and is subject to the usual medical underwriting.
Dwelling house Exemption
The dwelling house exemption was once a very effective way to pass property tax free from one generation to the next, however since Jan 2017 the rules regarding dwelling house relief have tightened considerably for fear that it was being exploited by the wealthy. 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.
As with all aspects of Financial Planning, the earlier you start the planning process the more effective it will be.
Barry Kerr BBS QFA CFP® is the owner of Wealthwise Financial Planning in Block C, Hartley Business Park, 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.