Capital Acquisitions Tax: Small Gift Exemption

A common question that many clients pose is “How can I make cash gifts to my family without it making them liable for gift tax?”

In some cases, parents may want to help children to afford their own home by contributing towards the deposit. In other cases, parents or grandparents want to support their children or grandchildren in pursuing further education opportunities.

Capital Acquisitions Tax (CAT) is a tax that imposes a charge on individuals who receive gifts and inheritances where the value of the gifts and inheritances exceed that individual's lifetime tax-free threshold. The size of that tax-free threshold is dependent upon the familial relationship between the person providing the gift or inheritance and the person receiving it. Lifetime group tax-free thresholds exist to help shelter some or all of a gift or inheritance depending on its value and the familial relationship. The current rate of CAT is 33%.

But there is a way to provide or receive a gift up to the value of €3,000 without having to pay CAT. This is called the small gift exemption, and it is a useful mechanism for providing for the next generation without necessarily utilising the CAT group thresholds mentioned above. These group thresholds may well be needed to shelter future gifts or inheritances of high-value assets such as land, property, shares or investments.

The small gift exemption allows any individual to gift another individual up to €3,000 in any calendar year without the gift being liable to CAT and without the gift eroding the relevant group threshold. The individuals involved do not need to be related to each other and any individual can receive multiple gifts from multiple donors as long as no individual gift exceeds €3,000 in a calendar year. There must be evidence available to demonstrate the transfer of the gift from the donor to the recipient. An example of this could be a bank statement showing the cash transfer from the donor to a bank account in the recipient’s name.

For example, a grandparent could gift €3,000 to their grandchild every year for 10 years to provide them with a college fund of €30,000 when they reach that stage in life. In that way, the grandparent can provide support for their grandchild at a time in their lives when the financial support may be more valuable and appreciated by both their child (who most likely will have other financial demands at that time) and their grandchild who has an opportunity to appreciate their grandparent’s generosity during their lifetime rather than after their passing. It is worth noting that this tax-free exemption is available to both grandparents, so the value of each year’s gift to their grandchild could be doubled to €6,000 without any tax implication.

This can be a really useful tool in successful tax planning and should be considered as early as possible in the estate planning process to ensure the maximum benefit is obtained.

One key consideration is that the donors must be mindful of their own future cash flow requirements. They should ensure that, in availing of the opportunity to provide for the next generation in a tax-efficient manner, they do not deplete their personal cash resources to a level where they cannot support their own financial needs later in life.

For additional information on the small gift exemption, inheritance tax, or any personal tax matters, please contact Emma Collins, Tax Director in our Galway office, or any member of the Mazars tax team.