Money Talks: How can I leave my children money without them paying too much tax?

Carol Brick of answers a reader's question on Capital Acquisitions Tax.
Money Talks: How can I leave my children money without them paying too much tax?

Money Talks: My husband and I are considering how best to distribute our accumulated wealth between our two adult children.

My husband and I are in our late fifties and beginning to consider how best to distribute our accumulated wealth between our two adult children. We have total assets worth approximately €950K and worried about the impact of Capital Acquisitions Tax. Have you any advice?

I am happy that you are already forward planning in terms of the distribution of your estate. Too many parents do not consider the possible taxes that might arise for their children on receipt of inherited assets.

As it stands, the current threshold for a child who is in receipt of a gift from a parent is €335,000. This is a lifetime limit and any previous gifts received by your children would need to be taken into consideration here.

I am presuming that they have not received any previous gifts from you and your husband. As the value of your children’s expected inheritance will be above their allowable threshold amount, they will be liable to pay CAT (33%) on the excess.

In the interim, should you be in the very lucky position to do so, you can both make gifts to your children (and their families if applicable) to the value of €3,000 each without any CAT charge arising and this will also not affect their overall lifetime threshold. This is called the “small gift exemption” and many parents are unaware of this extremely tax-efficient way to pass on wealth to their children. 

This does not necessarily need to be cash either, it can be any type of asset like a car, an equity portfolio, art etc. A person can in fact receive a gift from several people in the same calendar year and the first €3,000 from each person would be exempt from CAT. 

Just to give you another example of how this could work – if your son is married and has, say, two children, you and your husband could give him, his wife and two children €3,000 each so up to a total €24,000 tax-free every year.

If your family home is part of the inheritance, a possible exemption called the “dwelling house exemption” might apply. If appropriate, this would allow one of your children to inherit the family home free of CAT. This exemption protects individuals who live in a house that they do not own, but which they are likely to inherit once the owner usually their parent passes away. 

Applicable rules include the following, they need to have lived in the house full time for three years before the date of the inheritance, the person inheriting the house cannot own or have an interest in another and it would need to continue to be their main residence for six years after the date of the inheritance. 

With careful planning, this exemption can be utilised to protect the family home and offer you the opportunity to support your children in acquiring their own home in the future.

An Insurance policy that can be taken out to cover the cost of your children’s CAT bill is a Section 72 Policy. This is a whole-of-life policy and pays out a lump sum tax-free to your children on your death. Sometimes, it is the children who cover the cost of the monthly premium because after all, it is helping them to avoid paying a tax bill later when they receive their inheritance.

I hope this has helped but I would strongly advise you to obtain professional tax and financial advice before you decide on the most appropriate and tax-efficient manner to distribute your estate.

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