03 Mar 2018

How To Gift Your Children Tax Efficiently

  • Financial Advice

John O’Connor (Omega MD) writes a Personal Finance for the Irish Medical Times. This edition was printed on the 23rd February 2018.

How To Gift Your Children Tax Efficiently

Passing on wealth to children is a hot topic these days.  Where possible, we would all like to pass on some wealth to our children, giving them the best chance to make the most of their opportunities in early adulthood whether for that be for education, a house deposit etc.

It is well documented that everyone is allowed gift their children specific amounts without them having to pay tax on receipt. The maximum our children can inherit from us is €310,000 in our lifetimes or when we pass. So, if we make gifts to them during our lifetime, whatever we give them reduces the amount that they can inherit from us free of tax in the event of our death.  Any amount that is gifted to a child from a parent over and above the €310k threshold is taxed at a rate of 33% Capital Acquisitions Tax.

This threshold is at the top end and refers to child recipients. For other beneficiaries such as siblings or other relations, different rates apply. See the table below for more information.

 

Group Beneficiary   Tax Free Amount
A A child (including an adopted child, step child and certain foster children) or minor child of a deceased child of the person giving the gift   €310,000
B A brother, sister, niece, nephew or lineal descendant of the person giving the gift   €32,500
C All other relationships. Other than those mentioned in A & B   €16,250

 

How to gift minors in an efficient way
If you have decided that you want to pass on some of your wealth during your life, the ideal advice for a parent or grandparent is to ‘give early and to give often’.

The reason for this is that money given to a minor has the opportunity to grow in their own name throughout their early lifetime – the interest or investment growth on that initial amount doesn’t form part of the inherited or gifted amount.

Further to this, there is an opportunity to make small gifts to minors up to €3,000 on an annual basis that do not count towards a child’s inheritance tax free threshold.

For example, grandparents can each give their grandchildren €3,000 every year without the child incurring CAT.  The child can potentially receive up to €6,000 annually from both grandparents tax free (€3,000 from each).  These gifts will not count towards the child’s CAT threshold. Parents, aunts, uncles, and godparents can make similar gifts, without the child incurring CAT.

Setting up a trust for children
As mentioned previously, how you decide to manage the funds gifted to the child can have a significant impact on their future value. Any growth on investments will not be included in the CAT threshold.

A bare trust is a trust that can hold assets (such as investments) on behalf of children, grandchildren, godchildren or other young relatives. The investments are controlled by a trustee (usually a parent or grandparent) on behalf of the child until they are 18. Once the trust is set up, the investment and any gains belong to the child. A simple bare trust is easy and cost effective to set up and it can be used to hold a life investment or savings policy for the child.

Before you decide on this option, it is very important to consider your thoughts on how the assets will be owned and managed. Here are some key questions to ask yourself before you start:

Am I certain I won’t need the money in the future?
Once a bare trust is set up, the person you’re giving the money to becomes the legal owner.   It’s no longer yours.   Be certain you won’t need access to it before setting up a bare trust.

Who will I appoint as trustees?
Do you want to include yourself a as trustee? This can give you control over the decisions that are made about the investment. It’s best practice to have a second trustee in case something happens to you.

Who am I making a gift to?
These are your beneficiaries. Are you confident you won’t change your mind about gifting money to those particular beneficiaries?

What age are the beneficiaries?
Bare trust forms are designed for beneficiaries under the age of 18.

Giving money to your family and how to manage it are significant decisions.  If you want to help your children or grandchildren out as they grow older, start early.  Done well, it can ensure that you see your loved ones enjoying your gift while you’re still living rather than giving it to them as an inheritance.