Small Gift Exemptions - tax and practical considerations
A topic that often comes up with clients is whether or not they should utilise the annual small gift exemption for kids. The small gift exemption is currently €3,000 per person so in the case of 2 parents they could gift €6,000 to each child without impacting their thresholds. Individuals will sometimes invest these assets for the child’s benefit. Is this generally a good idea?
On the face of it, it can make sense but if you dig into it further there might be some unintended consequences.
The main drawback with this type of gifting is that the kids will have access to the money at age 18 (up to that it is effectively controlled by the parents via a bare trust). As most people will agree getting a large inflow of money at age 18 probably isn’t a great idea. A frequently cited argument is that they won’t tell the kids, however these days with the viral nature of information all it takes is one kid in the group to get wind of this type of product and all the kids will be ringing providers at age 18 to see if they have an account. Regardless of this argument is this gifting necessary? The answer is probably not.
There are plenty of other options that an individual could consider;
- Gift the Group 1 threshold of up to €335,000 when required for a specific purpose. This could be used to assist with a deposit of a home. This is entirely tax free based on current tax rules.
- Gift kids an amount of €70,000 at age 18 (this will come out of the €335,000 above) and invest it in a pension (PRSA account) for them. They can’t access this pension until age 60 (a feature not a bug!). This €70,000 will grow to circa €2m by age 60 based on historical growth rates. While €2m in 42 years will be less in real terms than it is now it will still provide them with a very good level of assets for their retirement. It is very much the art of the long game. Furthermore, the kids can carry forward the €70,000 when they start working and claim relief at 20% or 40% depending on their tax rate.
- Use the €3,000 per annum when kids are more established. It could also be expanded to help with expenses for grandkids (for example school fees). A couple gifting €24,000 per annum (2 parent gifting to 2 adults in a couple and 2 kids) will reduce the estate by €480,000 over 20 years which when considered together with the Group 1 threshold of €335,000 is quite a significant gifting to one child.
A key point is that tax alone should not drive a decision to pass assets to kids. Gifting with a purpose is generally the best use of funds (helping with a home purchase, business setup, etc). Consideration should also be given to the appropriateness of gifting in the context of the parents (donors) own financial structure. Quite simply, does your financial plan (constructed with conservative assumptions) allow gifting without consequences in the future to the financial viability of the donor.