Last week we spoke about Ludmila in our office and how she’s the lady to get your tax return right first time. This week we will look at gifting money to children. What to do and what not to do. The idea for this came from a client query whose son is getting married soon. She wanted to give him money for the big day but there was a better way. We will focus on
- Why now and not later
- Small gift Exemption
- The wedding
Why now and not later?
Mary Cleary is in her late 60’s and is very wealthy. She sold her business and was successful on the stock market too. There are no debts and a healthy annual income with pensions and investment returns. She has 5 children who are ranging in age from 32 to 45. They are all at different stages. Two are looking to buy a house. Two already have homes but with large mortgages and one is tying the knot soon. Mary wants to give them all money for a significant house deposit or to help them clear their mortgages. Also, she knows the money will be more valuable to them now than in 20 years’ time.
- She will have more than enough income and assets after gifting the money
- She knows that the children will use the money to buy homes or put towards clearing their mortgages
- All the children are successful, so their need is greater now than in the future
- It will save the children money now by having a much smaller or no mortgage.
- It will give her children a better quality of life as they will have less money worries now
- Money that was to pay debt can now go towards savings, pensions, and education funds for children.
The basics for gifting cash
Capital Acquisitions Tax [CAT] is a tax on gifts and inheritances. The CAT rate is 33% so you pay that on gifts or inheritances over a certain amount. The person who receives the gift or inheritance pays the tax. The person who gives the gift or inheritance is known as a disponer. There are lifetime thresholds, and these are dependent on who you get the gift from. Three Group Thresholds exist. Group A relates to your children, but it is very specific. It includes
- A child of the disponer or a child of the disponer’s spouse or civil partner [stepchild]
- A minor child, under 18, of a deceased child of the disponer [grandchild]. Or a minor child or the disponer’s spouse or civil partner [step grandchild]
- A minor child of the spouse or civil partner of a deceased child of the disponer or the disponer’s spouse or civil partner
- A parent of the disponer on an inheritance on the death of your child
The lifetime tax-free Group A threshold is €335,000. This was €500,000 and went as low as €225,000. Mary can gift up to €1,675,000 to her 5 children and they won’t pay CAT. But can she give them more than that?
Small Gift Exemption
The first €3,000 of gifts to a child in any calendar year is exempt from CAT under the small gift exemption. So, in Mary’s case, she could give an extra €6000 to each child over a few days, and they would still have no CAT liability.
Mary gifts her son Paul €338,000 in December 2021 and she gives him another gift of €3000 in January 2022. €3000 of the €338,000 is a small gift and is not taxed. Also, the €3000 in January 2022 comes in under the exemption. Mary could also give €3000 to Paul’s fiancée Isobel in December 2021 and €3000 in January 2022. If Mary wanted to give more, she could give up to €22,250 to Isobel over a short period. Gift Isobel €19,250 in December 2021 and €3000 in January 2022. This would use up the Group C threshold for unrelated people. I would think that the monies should go to separate bank accounts of Paul and Isobel. This would show proof of the lodgements in their accounts and the money coming out of Mary’s account. Also, separate cheques for each would work.
While the €3000 may seem small it isn’t when used in the right way. Mary decides to continue to give each child and partner €3000 each for the next 10 years. This is an extra €60,000 for each child and partner or €300,000 for the 5 of them. Mary could also give €3000 to each grandchild. She decides to set up a monthly savings policy for €250 per month that will go towards education.
This brings us back to the question our client asked. She had given her son Paul the max of €335,000. He was going to buy a new home and she decided to give him another €100,000. He would pay tax on €97,000 at 33%. This is €100,000 less the €3000 small gift. That is €32,010 in CAT. The house sale fell through. After paying the tax he will have €68,000.
Per Google, the average cost of a wedding in Ireland is €30,000. Paul gives his mam back €30,000. By doing this he will pay tax on €67,000 which comes to €22,110. Mary uses the €30,000 to pay for Paul’s wedding. If Paul keeps the €100,000 and pays for his wedding, he has €28,000 left
|Less Wedding Cost
If he gives €30,000 back to Mary and she pays for the wedding, then he has
As you will see Paul has saved tax of €9,900. But will he pay tax on the value of the wedding? No, he won’t. Revenue take the view that the cost of a wedding is an expense of the parent rather than a gift to the child. Hence no gift tax. They elaborate to say this “extends not just to the cost of catering for guests but also to all the costs associated with the occasion.” What is not included is the honeymoon. They confirm that a gift such as a car, a house or a paid holiday is still a gift for tax purposes. Even if it is associated with a family occasion such as a wedding.
I know the above situation with Mary is not that common. But there is increasing wealth in the country. Parents know that it is difficult for children to secure mortgages and homes. They know that they must be comfortable themselves before passing on wealth. The thresholds are lifetime ones, so the use of the small gift exemption can help reduce the tax cost. Maximising thresholds among spouses or civil partners of children and grandchildren will all help too. Plus, you can pay for the family wedding. I must pass this blog on to my brother as his daughter is getting married in August. He’ll be very excited that he can pay for the whole wedding with no tax implications for his pride and joy!
Do you want a tax-efficient plan to pass on wealth to your children? If so, start here