BY JOHN ELLIS, FINANCIAL ADVISOR
Young people today grapple with soaring house prices and stagnant wages, while parents and grandparents are looking for ways to offer a leg-up without adding to their children’s/grandchildren’s tax burden. The annual small gift exemption is a straightforward tax benefit that, when combined with child savings plans from providers across the country, becomes an effective strategy for passing on wealth to the next generation.
But does it deliver the seamless boost it appears to, or is it more hype than help? Let us look at it.
The small gift exemption boils down to this. Under Capital Acquisitions Tax (CAT) rules, you can gift up to €3,000 per calendar year to any individual without paying gift or inheritance tax. It will not reduce your lifetime tax-free thresholds, €400,000 for parent-child relationships and €40,000 for grandparents and grandchildren. A married couple can gift €6,000 tax-free per child annually. As financial guides often highlight, this lets you “support your loved ones while you’re still alive,” dodging the CAT hit that could otherwise eat up 33% of bigger transfers.
Insurance providers offer child savings policies, often called small gift savings plans to make this exemption practical. For children under eighteen, the donor (perhaps a grandparent) opens the policy in their name, then assigns ownership to the child. Post-assignment premiums count as gifts, maxing out the €3,000 limit. These plans invest in a selection of funds, from cautious to high-risk funds.
Imagine as a parent saving your children’s allowance into one of these plans, currently €140 a month from birth, and it could grow to around €49,000 by age 18, assuming a 4.1% annual return. That is illustrative, mind, as markets fluctuate up and down over time.
For those over 18, it is even easier. The young adult owns the policy, while you gift premiums straight in. No assignment required, and if the donor dies, the plan can continue, as it is built for longevity.
This setup excels at tax-efficient estate planning. Consider a typical example. A widowed relative with seven young grandchildren consults an adviser about reducing a large potential inheritance tax bill. Using the small gift exemption, they put in place policies for each grandchild, gifting €3,000 yearly, €21,000 total annually, tax-free. This moves wealth from their estate without touching the grandkids’ €40,000 Group B threshold, even if the donor passes away early. There is no CAT on the gifts or encashment. Just standard 38% exit tax on gains at maturity.
In a housing market where under-thirty-fives hold just 10% of homes according to the Central Statistics Office figures, this could fund those €30,000 – €50,000 deposits, easing the squeeze while also reducing future inheritance pots.
That said, pitfalls lurk. Assignments cannot be undone, so family fallouts leave donors able only to pause payments, not reclaim control of the funds. Projections like €49,000 assume steady returns, but investments can and unfortunately do fall, with currency shifts adding volatility. No backdating for missed years is allowed, and exemptions are calendar-bound and exit tax still applies on profits.
In essence, these savings plans level the playing field for ordinary families battling generational wealth gaps. They are low-fuss and accessible via any Irish provider.
Yet they are no shortcut. And as the experts say, “Start saving now!” That yearly €3,000 could be the means of turning tomorrow’s dreams into a reality.
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