Brian Keegan: It's inevitable Revenue pursues gifts from the bank of mum and dad

Increasingly, parents are giving interest-free or low-interest loans to their children to help them to buy a house

Money given to a child for a deposit on a house counts as a taxable gift, as does providing a house rent free.

Last Friday was the final day for submitting tax returns by individuals who are self-employed or otherwise caught by the self-assessment regime. Having to file a tax return is a requirement that doesn't apply to most of us as most tax affairs are handled through the PAYE system. There are other situations too where a tax return might have to be made. These include receiving a substantial gift or an inheritance.

Matters get more complicated with gifts and inheritances, and particularly with gifts among families. Gifts and inheritances are taxed at 33%, but there are substantial exemptions which are based on the relationship between the giver and receiver. 

Transfers between spouses are exempt but the biggest exemption is between a parent and child. Up to €335,000 in value can be gifted to, or inherited by, a child, or orphaned grandchild, without attracting gift or inheritance tax. Unlike an income tax credit which is valid for a year, this so-called capital acquisitions tax threshold is a lifetime amount.

Scope for grey areas

That inevitably gives rise to questions over what should or shouldn’t be taxed over the course of a parent and child relationship. As a general principle, there is no tax charge for the support, maintenance, or education of children under 18, or under 25 if they are still in full-time education. A parent can also pay for a family function such as a child’s wedding without tax consequences. But that still leaves plenty of scope for grey areas.

Money given to a child for a deposit on a house counts as a taxable gift, as does providing a house rent free. In the latter case, the value of the gift is calculated as the amount of the rent which would have been payable. Even in this era of high rentals, rent-free accommodation is unlikely to trigger a tax charge on its own, but the benefit does wear down the €335,000 exemption. Revenue won’t try to charge tax though on the benefit to any child, irrespective of age, of staying in the family home. That’s a pragmatic approach to an ever more prevalent phenomenon.

Also growing in frequency is the practice of parents giving interest-free or low-interest loans to their children to help them to buy a house. That taxable benefit is calculated by reference to deposit rates — what the child is paying compared to what the money would earn on deposit. In this era of historically low deposit rates, that approach doesn't do much for the exchequer. A plan to change the calculation to base it on lending rates rather than on deposit rates has been dropped in recent days.

Brian Keegan, director of public policy with Chartered Accountants Ireland

In practice, most gifts to a child, or for that matter to anyone else, won’t attract gift tax because there is an annual exemption available of €3,000. But for bigger items, such as perhaps the gift of a house deposit or a car, it’s a good idea to keep track of the value because they will come into the reckoning at some stage down the line for gift and inheritance tax. While the business of dealing with inheritance tax is most often handled by the solicitor dealing with the will, the responsibility for declaring large gifts is primarily with the recipient and is part of the income tax return cycle.

Just over half a billion euros in inheritance taxes and gift taxes was paid in 2020. It’s an easy thing for taxpayers to overlook, but with receipts of that scale which are on a par with local property tax, Revenue pursue gifts and inheritance taxes just as keenly.

• Brian Keegan is director of public policy with Chartered Accountants Ireland