Consumer Corner: How to give money to your children without facing a huge tax bill
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Saving to buy a home can be extremely difficult for many people. Of course parents will want to do what they can to help out but giving money to children is not straightforward when you factor in tax rules and making sure you are obeying Revenue regulations. However, despite the restrictions, there are ways and means that parents can help out if their child is saving to buy a house.
Trevor Grant, chairperson of the Irish Mortgage Advisors says they regularly come across instances where parents want to give their children a helping hand: “Generally, we see parents helping out with the deposit for a home rather than paying large amounts of the purchase price. Our mortgage experts would always advise that customers should know where they stand from a tax perspective when this arises.”
The long and short of it is when parents give their children money for a deposit on a house, the gift may have tax implications under Capital Acquisitions Tax (CAT) rules. Children receiving a financial gift from their parents fall under Group A for CAT purposes.
Since the most recent Budget, the tax-free threshold for this group is €400,000. This means a child can receive gifts or inheritances up to this amount from their parents over their lifetime without paying any tax. If the total value of the gift exceeds the €400,000 threshold, the excess is subject to CAT at a rate of 33%.
“It’s worth noting as well that the Group B threshold, which applies to inheritances from grandparents, siblings, nieces, and nephews, was increased in the Budget from €32,500 to €40,000.”
Marc Westlake of Everlake says that a good idea is to ‘drip-feed’ your inheritance while you are still alive: “Do it ideally when your children are in their early 30s, as this is the time they will often start to think about buying a home. Gifting your inheritance sooner rather than later could help your children have financial resources in place when they most need it.”
He suggests: “Rather than gifting money to a child towards the deposit for a home, consider an inter-family loan instead. Loans are a very tax-efficient way of giving a child a leg up onto the property ladder. If you have cash savings sitting in the bank that you don’t see a need for in the near future, this can be an efficient way to put them to use. You will need to decide if the loan is interest-free or interest-bearing and consider the tax implications of each option for both you and your loved ones benefitting from the loan.”
Also the small-gift exemption allows anyone to receive cash or assets to the value of €3,000 per year from any individual tax-free and this could be an ideal way to help your child build up a fund that can be used at some point in the future to buy their first home.
With this exemption, each parent or grandparent can give a gift to a value of €3,000 to a child so two parents could gift €6,000 tax-free to the child in any year. If the child is buying property with a partner, the partner could also be gifted €6,000 tax-free, meaning the parents could gift €12,000 tax-free in total a year to the couple. This amount does not count toward the overall CAT threshold of €400,000.
“As there is no obligation to spend the gift in the year it is received, the money can be saved up to fund the cost of a future house deposit. So if you and your child have time on your side, the small gift exemption is certainly worth considering but be careful to document the gifts given each year in case Revenue were ever to query them.”
Mr Grant says that in certain instances, some lenders may require a letter from the parents stating that the money is a gift and not a loan, ensuring that it will not need to be repaid, which could affect the borrower’s financial capacity.
Barry McCutcheon, protection proposition lead with Royal London Ireland says future planning in the form of inheritance tax planning is something that everyone should consider, particularly someone you want to leave assets, like their home, savings or possessions — to someone other than their spouse or civil partner.
“It is possible to offset some, or all, of the future inheritance tax liabilities that your loved ones may face by using a ‘Whole of Life’ insurance policy. To do this, you must set up your ‘Whole of Life’ policy as a ‘Section 72 Life Insurance’ policy when you first take it out. This will make sure that the money paid out by the policy has been approved by Revenue to be used to help pay inheritance tax. If used for this purpose, it will not in itself be liable to tax, meaning you can help ensure that your assets will be passed on to your loved ones rather than being used to pay a tax bill.”