My 25-year-old son is doing a one-year postgraduate master’s in an Irish university. As he had been unemployed one and a half years before starting this course, he had very little money. I am paying his university fees of €10,000 and also funding his accommodation etc. Can I apply for tax relief on the fees? Or does my son apply? This money is not a loan to my son.
Is this money considered as part of his future inheritance from me? What are the tax implications for both me and my son?
Ms E.O’L., email
Your son is hardly alone in the environment that has prevailed over the past 21 months, with the Covid-19 pandemic meaning a lot of people have lost their jobs. Even where the job loss is not necessarily as a result of the restrictions that have hampered business over that time, it has meant that the prospects of landing further employment have been severely limited.
Not surprisingly, a lot of people – not just younger ones – have had time to reflect on their circumstances and plans. For many, the hiatus has been the catalyst for a change in career or a decision to improve their qualifications and employability by returning to college.
But the cost of doing so – and the additional cost of living while studying – is not insignificant and that can be an impediment. Your son is fortunate that you are in a position to help him financially but you are sensible to check what support is and is not possible. The rules were tightened significantly a few years ago amid what was perceived to be abuse of the process by wealthy parents to essentially fully fund large parts of their adult children’s lives.
So there are two things here: tax relief on college fees and financial support for your son.
Let’s tackle the former first. Tax relief is available on fees paid for recognised college courses, which would certainly include a master’s programme at a university. The relief is claimed at 20 per cent by the person paying for the course, regardless of who is actually taking it. So, in this case, it would be you that can apply for relief, not your son.
But there is a limit on the relief you can claim for any course taken by your son and that is €7,000. The cost of master’s programmes varies according to the college and the discipline but the upper limit for relief is fixed.
That limit includes tuition fees and any student contribution. That seems to cover the figure you are talking about. It does not include money spent on student or Union of Students of Ireland levies, or any additional administration or sports centre charges.
However, from the €7,000 – or any lower course fee figure – the Revenue Commissioners subtract the first €3,000 paid by the claimant in eligible fees. In your case, this means your claimable €7,000 falls to €4,000. If a family was claiming for more than one student, the €3,000 disregard applies across the whole claim, not per student.
So, in this case, you put in the claim for €7,000, Revenue will disregard the first €3,000 and you will get relief of €800 on the fees – 20 per cent of €4,000.
Then we move on to the trickier area of parental support. As I said above, the rules were tightened here in the 2014 Finance Act. And, critically for you, there is a cut-off in age terms – 25.
The good news is that, as of now, you are below it.
Section 81 Finance Act 2014 says that payments made to a child will not count against that child’s lifetime tax-free limit on large gifts (above €3,000 in a year) and inheritance from a parent where it is used for their support, maintenance or education, but only in very specific circumstances.
First, unsurprisingly, financial support for a son or daughter – or the child of a civil partner – who is a minor is exempt. So too are your own children or those of a civil partner, ,where the child is “permanently incapacitated by reason of physical or mental infirmity from maintaining themselves” regardless of age.
The third category is the one of interest to you. It covers adult children – including those of a civil partner – who are over 18 but “not more than 25 years of age” and who are in full-time education.
This means that, for now, you can continue to pay your son’s fees and maintenance and it will not have adverse implications in terms of any future inheritance or gift. He will retain the full category A tax-free allowance for a child from a parent, which currently stands at €335,000.
However, if he turns 26 during the year, the position will change. You and he will not longer be able to avail of the exemption and any money you spend on fees or accommodation after that will be offset against his lifetime category A limit.
It should be possible to pay the full fees up front – assuming you can afford the outlay – so that they do not fall after his 26th birthday. As for accommodation costs, you can still avail of the annual small gift exemption, which allows you to gift your son up to €3,000 in any year without it impacting his inheritance tax threshold.
Small gift exemption
If the costs of maintaining your son are being shared by you and his father (or anyone else), he can avail of the €3,000 exemption in respect of each funder, which could raise the benefit to €6,000, or more.
I know you have said the support you are giving your son is not a loan, but if those reliefs do not cover the amount needed for him to see out his course once he turns 26, any future costs could be framed as a loan.
Revenue requires family loans to charge a rate of interest at least equivalent to the prevailing interest rate on demand deposits. But with those rates currently at zero, they would not be a factor for the moment.
The loan could then be paid off using the small gift exemption over two or more years without putting your son under financial pressure, which would seem to achieve your intent.
Finally, in terms of actual tax liability, it does not arise for either you or your son in the scenario you outline.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice.