Reserving funds in your account to eventually pay over to a child may logically appear to be a wise step. Yet, the Tax Appeals Commission’s decision in a contemporary case provides definitive advice for individuals seeking to use the minor gift exemption to transfer money sans the taxation fees.
What lessons can other families extract from this case and what errors should they circumvent when bequeathing the assets they have painstakingly accumulated to their descendants?
In the year 2022, a young man was burdened with a capital acquisitions tax (inheritance or gift tax) invoice totalling €65,835 after receiving gifts valued at roughly €500,000 from his parents. Over a span of time, he had been the recipient of multiple gifts from his parents and great-aunts. These included: An aggregate payment of €170,000 from his parents, whereby €42,000 was contributed by his two great-aunts; an aggregate of €19,245 in gifts earmarked for commemorating milestones such as his Holy Communion, Confirmation, birthdays, and sporting accomplishments, condensed into An Post savings certificates and liquidated in 2018; and ensuing gifts totalling €307,000.
This tax liability arose when his tax-exempt limit of approximately €335,000 was exhausted, rendering the surplus gifts subject to capital acquisitions tax (CAT). This resulted in a CAT of €49,500 for the most recent gift of €165,000 received in 2021, and an additional CAT of €16,335 for his parents’ subsequent gift of €49,500 utilised to settle the initial CAT fee.
The family contested that a portion of the funds gifted to the young man was executed utilising the small gifts exception, allowing any individual to confer a tax-exempt gift of up to €3,000 annually (cumulating to €6,000 yearly from both parents to a single child). When the case was presented to the Tax Appeals Commission, the young man challenged that the small gifts exception should exempt him from CAT, since it had been employed for sums that his parents and others had set aside for him post his 1992 birth.
Ultimately, the commission concluded that the gifts weren’t qualified for the small gifts exception. This verdict is noteworthy for anyone aiming to make use of this scheme in order to sidestep potential taxes. It’s recommended to avoid maintaining funds in your personal account.
The father testified in court that the money accumulated in the account he co-owned with his wife was designated for his son as part of the small gifts exemption. He explained that the money had been set aside in their joint account for this purpose. When asked how he determined the amount to be gifted from the joint account for the exemption, he described it as a straightforward method.
The father demonstrated that he simply traced back to 1992, when he and his wife each gifted £500 to his son, an amount, which later increased to between £750 and £1000. Following this calculation, he totalled €105,000 gifted to his son between 1992 to 2017.
However, the lawyer representing the Revenue challenged the father’s method, arguing that he had retrospectively assessed his financial position upon submitting the Form 11 [self-assessment tax] return in 2018, to figure out an amount that could be given to his son without incurring Capital Acquisition Tax (CAT).
Case commissioner, Conor O’Higgins, noted that these payments did not involve transferring money to a separate account in his son’s name as would usually be expected. For other families, the recommendation is to create separate accounts for the individual receiving gifts up to €3,000 annually.
Marie Bradley of Bradley Tax Consulting advised that funds cannot be amassed in an individual’s account, as this does not alter the beneficial ownership of the asset. For a gift to be established, the beneficial ownership must be transferred.
One point of contention in the appeal was the lack of supporting paperwork to validate the earmarking process. Bradley emphasised the importance of having documented evidence of the gift, as the onus of proof lies on the taxpayers.
According to Bradley, a gift connotes the conveyance of profitable ownership in an asset from an entity to another. This can be done by setting up a separate banking account. Adequate proof of this yearly transaction must be acquired. Ideally, it’s a cash payment; thus the evidence could be a bank statement proving that funds have been transferred from your bank account to the recipient’s.
To make this easier, you can open an account in your offspring’s name, with a bank, credit union, or An Post. Alternatively, a bare trust account, like with Standard Life, can be created. This gives the parent or grandparent, as the trustee, control over the funds’ saving/investment, yet the child owns the funds and can access them upon reaching 18 years.
When grandparents cover school fees, they must note this operation. In a particular lawsuit, the failure to provide any supportive documentary evidence was deemed as a “fatal” mistake.
The clear and simple alternative would have been creating a banking account under the beneficiary’s name and transferring the gifted funds there. There was no convincing explanation as to why this was not carried out. Nonetheless, the father and his wife could have maintained a contemporary record of their monetary gifting. This, however, was not presented during the trial.
One may wonder how Revenue discovered the gifted sums; it was disclosed when the son filled out a Form 11 return in 2018. He declared receipt of €170,000 in 2017. The father submitted a document along with the return, declaring that this amount were annual small presents from him, his wife, and the son’s late great-aunts.
Not everyone has to reveal they’ve used the small gifts exemption. A Revenue spokesperson indicated that if filing an income tax return, the necessity to disclose receipt of any gift or inheritance within the relevant tax year must be indicated on the form.
Once the total value of your gifts or inheritances reaches 80% or more of the relevant limit, you have a duty to complete a gift or inheritance tax form (IT38), even though tax may not yet be payable. To put this into context, if you receive gifts or inheritances from your parents as their child, that amount to €268,000 (which is 80% of the €335,000 Category A limit), you’d be mandated to comply with this requirement. Should the gift come from a grandparent or a direct relative to a child, the minimum disclosure under Category B is €26,000.
That being said, it’s crucial to understand that gifts falling under the small gift exemption are non-taxable, hence not warranting a tax return. As explained by the spokesperson for Revenue, a CAT return is not required when a gift exempt from CAT following the small gift exemption exceeds the 80% limit.
Let’s take an example of grandparents covering school tuition. Taking advantage of the small gift exemption, they can grant their grandchild €6,000 annually. However, if the tuition costs €7,000 a year, the extra amount will start to chip away at the limit. This implies that the additional – say, €1,000 over a year, or €6,000 over six years – will lower the child’s Category B exemption, currently pegged at €32,500.
Issues may also arise on death. When applying for probate, children are required to disclose earlier received gifts and inheritances to determine the extent to which – if at all – tax-free exemptions were used up.
Although adhering to tax requisites when making use of the small gift exemption is crucial, it remains an efficient strategy in lowering future inheritance taxes. Bradley asserts: “It is a very advantageous tool.” Her practical advice is to pick a specific date in the year (“an important date, such as a birthday”) and pay the gift each year on that date.
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