Utilising the Annual small gift exemption
Given that Gift and inheritance tax rates have now increased to 33%, for many people it may be worth utilising the annual small gift exemption as a long term inheritance tax planning tool.
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.
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.
Where the money is given to an adult, this is not generally an issue but where the beneficiary is a minor and the adult wishes to set up a savings policy to accommodate the gift this can be more difficult.
A solution to this is for the adult making the gift to be policy owner on the regular savings plan and once the policy is issued, the ownership of the contract is transferred to the child using a Deed of Assignment, which the life insurance company can provide.
It must be remembered that Gift Tax is a self-assessment tax. The obligation to make a return to the Revenue Commissioners rests with the person who receives the gift. An Inheritance Tax/Gift Tax Return must be filed when a gift either by itself or when aggregated with prior gifts exceeds 80% of the appropriate tax-free threshold amount. This reporting rule does not apply to the annual small gift exemption.
In conclusion, with the thresholds being reduced and the rate of CAT being increased, it makes sense to use the annual exemption to your advantage. Unfortunately this exemption is not carried forward, so if it is not used each year it is lost.
Contact Declan Maher on 087 1444977 or at firstname.lastname@example.org if you would like to find out more.