Is it possible to give up to €400,000 tax-free to each of your children as a gift while you are alive? I believe this may be possible through the use of their €400k inheritance tax-free allowance.
They have not received any inheritance to date, but they have received €6,000 per annum from my husband and myself, which we can gift them tax-free.
I understand that when we die, all of their inheritance will be subject to 33 per cent tax, but I feel they could do with the €400,000 now for house deposits.
Ms J.G.
Well this is refreshing. Not that you have €400,000 to gift each of your children, though that is certainly their good fortune, but that you are alert to considering when such a tax-free gift might best be of use to them.
The tax rules are very clear. Your children are entitled to receive a certain amount by way of gift or inheritance without liability to tax.
Everyone is entitled to this, but the amount that can be gifted or inherited tax-free is far higher for children receiving from their parents than any other group. The actual threshold can change from time to time, but right now it is €400,000.
This is called the Category A tax-free threshold. Category B, which governs gifts and inheritances received from a blood relative – a sibling, grandparent or aunt/uncle – is just €40,000. Category C, which covers all other relationships, is half of that again, €20,000.
The thing to remember is all of these are “lifetime” limits, covering everything a person has received since December 5th, 1991. So, if someone gets an inheritance from one parent of, say, €50,000, they have just €350,000 left for any future parent inheritances and gifts.
If the tax-free thresholds change, that might change, as your allowance is always measured against the tax-free threshold in place at the time the beneficiary receives their gift or inheritance.
As you note in your query, when it comes to gifts, it is also important to remember that the first €3,000 of any gift from any person is not counted against their lifetime tax-free limit. This is covered separately under something called the small-gift exemption.
If both parents are party to the gift, the exemption is €6,000, as the beneficiary is entitled to receive €3,000 from any individual and clearly the parents count as two individuals.
The small gift exemption counts strictly against gifts given in a particular tax year. So, for instance, your child cannot receive a gift of €12,000 from you and your husband to help with a house deposit and then suggest to the tax authorities that it covers this year and next. That wouldn’t work. In that case, €6,000 comes under the small-gift exemption and the remaining €6,000 is marked against their lifetime limit.
The small-gift exemption is a really tax-efficient structure for parents and even grandparents or other family looking to give a financial hand to children or younger relatives – at least for those fortunate enough to have the financial wriggle room to consider it. Of course, for the parent or other benefactor, this gift is coming from after-tax income.
A gift of even €1,000 per parent per year over a couple of decades of a young person’s life would give them a pot of €50,000 at the age of 25 even without any investment gain – a handy pot for a deposit on a first home.
In your case, you are fortunate enough to be in the position to consider handing over €400,000 to each of your children while you are still alive.
There is absolutely nothing to stop you doing so. The only reason more people don’t consider substantial lifetime gifts is that they don’t have the resources to be able to do so. For most people, the money they will leave their children is locked up in their own home.
Whether it makes sense to do so is another thing and one only you can judge. You mention house deposits, but €400,000 would buy a home mortgage-free outside Dublin. That’s according to Central Statistics Office figures, which show the average price of property at €364,000. Even in Dublin, where the average was about €475,000 in the first quarter of this year, it would leave a young couple close to mortgage-free.
While big mortgages can certainly be a burden, there is a valuable financial discipline for young adults in learning how to manage finances, including managing debt. Paying a mortgage also provides a credit history which can be useful down the line.
While a financial helping hand now is useful in funding a first home, it might be worth considering whether a windfall at a future date is also welcome. This could help your children assist with paying college costs for their own children, if they have any. It may also allow them to give their children a helping hand with their own home deposits.
It is certainly worth weighing up the merits of giving, say, half that sum now so that a similar amount would remain available to them down the line.
Of course, even if you do proceed with this gift in full and with capital acquisitions tax (CAT) on future inheritance, your children will still benefit from two-thirds of whatever future inheritance comes their way from either of you. This is with a view to the current CAT tax rate of 33 per cent.
For now, as your children have received no inheritance from either of you and no gifts in excess of the €6,000 between the pair of you each year, they will have no tax to pay on the gift. There is certainly no tax disadvantage to you or your children in choosing to gift now rather than them waiting for an inheritance.
What they will have to do, however, is file a return with the Revenue. This is obligatory once a beneficiary passes the 80 per cent mark of each of the three thresholds. It is determined not by the size of the individual inheritance or gift, but the cumulative impact of large gifts and inheritances down the years.
The return is made via an IT38 form. This is available online from Revenue through either the MyAccount or ROS platforms, whichever is relevant to each of your children. There is also a paper form alternative.
Hopefully, such a gift will give them considerably more than a house deposit. Used wisely, it could help them enormously in those early adult years when they are investing in their future and possibly juggling significant childcare costs.
As you say, unless the threshold rises from the current level, your €400,000 gift means each child will pay tax at 33 per cent on any future inheritance from either you or your husband. But the money – or at least some of it – is probably more use to them now than it will be in the distant future.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
