How to give €1m to your family tax free
Let's talk about tax for a minute with a brief overview of some of the challenges faced by people who want to transfer wealth to their loved ones. Unfortunately, in Ireland we have a pretty penal tax environment in this regard. Capital Acquisitions Tax (CAT) is charged at a headline rate of 33% to a recipient of gifts received from someone during their lifetime or as inheritances at their death.
There are exceptions to this though, and we're going to look at the main ones that apply to most people. First of all, we have CAT thresholds. The recipient only pays tax on the value of a gift or inheritance above a tax-free group threshold amount. This means that effectively, the amount of tax you pay depends on your relationship to the donor of the gift or inheritance.
- As a spouse, you can receive a gift or inheritance of any amount with no tax liability.
- Group A threshold: As a child or stepchild, you can receive a lifetime total of gifts and inheritances from parents of €335,000 without paying tax. Any excess gifts or inheritances above this are liable to tax at 33%.
- Group B threshold: As a more distant relation (e.g. a grandchild, sibling & others), you can receive a lifetime total of gifts and inheritances from donors under this category of €32,500 without paying tax. Any excess gifts or inheritances above this are liable to tax at 33%.
- Group C threshold: If you are not related under the above groups, you can receive a lifetime total of gifts and inheritances from donors under this category of only €16,250 without paying tax. Any excess gifts or inheritances above this are liable to tax at 33%.
Capital Acquisitions Tax is an unwelcome shock for some people, often at the time of inheritances being received. This is particularly acute where large amounts of wealth are being received by a small number of beneficiaries. They see a big chunk of their windfall disappearing in tax…
Small Gifts Exemption
So, how can you give large amounts of money to your family without it being eaten away by tax? The simple answer is with planning and time…
As the Revenue set out on their website," You may receive a gift up to the value of €3,000 from any person in any calendar year without having to pay Capital Acquisitions Tax (CAT). This means that you may take a gift from several people in the same calendar year and the first €3,000 from each disponer is exempt from CAT." This is called the Small Gifts Exemption, and it is a very valuable tax planning tool. You don't pay CAT on these gifts and they are not deducted from your CAT Thresholds as outlined above. We'll demonstrate the value of this by describing a recent situation we had with a client.
Paul & Anne recently sold their retail business for quite a tidy sum. They're satisfied that they have more than enough to live on for the rest of their lives and want to share some of the spoils with their 2 sons and their 5 grandchildren. Their issue is that if they write a big cheque to their sons, this will simply wipe out their sons' CAT thresholds, and they will end up paying a lot of tax both now and on eventual inheritances from Paul & Anne.
We suggested instead that both Paul and Anne should each gift €3,000 every year to their 2 sons, 2 daughters-in-law and 5 grandchildren. This is 18 gifts each year between Paul and Anne at €3,000 per gift - with no tax liability attached. Paul & Anne are only in their early 60s and they are planning to do this for the next 20 years.
18 gifts x €3,000 p.a. x 20 years = €1,080,000. All tax free.
Small amounts add up given time. Each recipient will receive €54,000 in gifts over the period, along with investment growth that they are aiming to achieve. And all of this, with no deduction from their CAT thresholds for further inheritance down the road.
Have you a gifting strategy in place to pass your wealth tax efficiently to your loved ones? Contact your Unio consultant for more information about how we can help you make use of this valuable tax planning tool.