BY JOHN ELLIS, FINANCIAL ADVISOR
Did you know that you can receive a gift up to €3,000 from any person in any calendar year without having to pay Gift Tax?
You may even receive a gift from several people in the same calendar year and the first €3,000 from each person is exempt from Gift Tax as they are not considered in calculating tax nor included for aggregation purposes.
What is Gift Tax? Gift tax comes under the Capital Acquisitions Tax ‘umbrella’ and is a tax payable on certain gifts made during the lifetime of a donor. On receipt of the gift the thresholds for Capital Acquisitions Tax (CAT) apply. If the value of the gift comes under the threshold amount, no tax is payable until such time as the value of all accumulated gifts exceed the relevant threshold.
These thresholds can be reached either by a single gift or by a series of gifts and inheritances over a number of years and the tax to be paid is determined by the relationship to the donor. Only prior gifts and inheritances to which the same group threshold applies are added together for the purposes of calculating tax.
Over the last few years, there has been a lot of interest in gifting cash to children and grandchildren tax efficiently. Grandparents especially are using this method to pass some of their accrued wealth to their grandchildren in a tax efficient manner.
The most tax efficient manner is by using the annual Small Gifts Exemption. You can set up a savings plan with an insurance provider for the child into which you invest your gifts up to the €3,000 limit as a single person or €6,000 for a married couple annually.
But its more complicated that just setting the plan up. You must decide whether to set the plan up using a General Trust Form or as an ‘assignment model’ savings plan set up by an insurer for this type of saving. What is the most effective way? Depends!
By setting up a savings policy under a General Trust Form, you can determine who will benefit from the proceeds of policy. You retain control of the plan. You decide how it is invested. You keep it safe from creditors. You can change the beneficiaries if required. Should you die there is no delay in the proceeds being paid out quickly to the beneficiary.
By using ‘the assignment model’ you assign the plan to your child/grandchildren from outset. It then becomes their policy. By legally assigning the savings plan in this way, the contributions count as gifts to the child. All premiums are deemed to be paid to the child and are owned by the child. The child will be entitled to the proceeds of the policy because under the assignment they are the owners of the policy.
You make full use of the small gift tax exemptions and provided you stay within the annual gift tax exemption the child will not incur any gift tax as the contributions are made or when the plan is encashed.
There may be drawbacks going down either route so you need to be very careful from outset how the plan is set up and how the funds are invested. For example with one provider once the plan and the investment strategy is set in motion they cannot be changed as it is not possible to take instructions to a minor.
This might not be an issue in the early years’, but it could become a problem later on especially in a declining market. As is always the case you should seek advice from your financial advisor before you set up the plan to ensure the policy meets your needs.
John@ellisfinancial.ie
086 8362633
