How can I best use the €3,000 Small Gift Exemption
The current rate at which Capital Acquisitions Tax (CAT) is charged is 33% and applies to a gift or an inheritance in excess of the thresholds.
Capital Acquisitions Tax Thresholds for 2022
€335,000 (Group 1)- Child, or minor child of a deceased child.
€32,500 (Group 2) – Brother, sister, child of a brother sister, lineal ancestor or descendant.
€16,250 (Group 3) – Other
It’s important to note that all benefits received since 5/12/1991 are taken into account for the threshold.
There is however a small gifts exemption of €3,000. The gift exemption can be availed of regardless of the relationship between the person giving the gift and the person receiving the gift. A gift of €3,000 can be given to the same person once every calendar year without having an impact on the above Capital Acquisitions Tax Thresholds.
Practical Applications of the Small Gift Allowance
- Adult children can financially assist their parents by each gifting them €3,000 per annum. This will not be included against their Group 2 threshold.
- The most common use of the allowance is for grandparents, parents, aunts and uncles to gift money to children on an annual basis. Gifts can be accumulated by a child to meet future expenditure like education or for a deposit on the purchase of a house. Both parents could gift €3,000 each to their child and also their child’s partner, so a gift of €12,000 can be given by 2 parents to their child and his/her partner in any calendar year.
- It can be used as part of an Estate Planning process to reduce future inheritance tax liabilities for children and grandchildren.
How do you gift money to a child
If the gift is to be valid the ownership of the money must clearly pass from the disposer (the person giving the gift ) to the beneficiary ( the person receiving the gift). The best way to do this is to pay the money into a bank account in the beneficiary’s name.
If the child is an adult there will be no problem as the chances are they will have a bank account and anyone over the age of eighteen can effect a life assurance based savings plan.
When the beneficiary is a minor, it is still possible but a bit more completed and will depend on the type of account.
Typically a child will be able to open a deposit account in their own name from age seven but this will depend on the Financial Institution. To open a long term regular savings plan with a Life Assurance company the plan needs to be set up initially with the beneficiary as the Life Assured but the person giving the gift needs to be the proposer/ policy owner on the contract. The reason for this is that a minor can’t enter into the contract themselves. To overcome this problem a Deed of Assignment can be drafted as soon as the plan issues which will make the child the beneficial owner of the plan. The Deed of Assignment can be provided by the Life Assurance Company.
Do you need to declare the payment on a tax return
No. There is no need to include the payment in a tax return when you make a gift within the small gifts exemption. The same goes for the beneficiary of the gift. It is advisable to leave a paper trail in case the payment is queried at a future date.
If however, you receive a gift that brings the total gifts received from 5/12/1991 to more than 80% of the tax free threshold for that group you need to include this in a tax return.
Adrian Godwin is a Senior Financial Consultant and the co-founder and managing director of Oaktree Financial Services. With a background in accounting and tax advising, Adrian specialises in estate planning and wealth management.Adrian offers clients reassurance through best practice solutions. His unique skill set and qualifications enable clients to develop comprehensive life plans that align with their goals.