The largest intergenerational transfer of wealth in history is under way, making major concerns of succession planning, gifting and estate structures for affluent families. Gifting house deposits, leaving money, capital gains and inheritance tax – what’s the best way to share your wealth with your children? We ask the experts.
If parents know they want to transfer wealth to their children, starting early can provide much greater flexibility, says Nicholas Charalambous, managing director, Alpha Wealth. “The €3,000 small gift exemption can be used each year, while the larger capital acquisition tax (CAT) threshold can be considered as part of a wider succession plan.
“The important point is that gifts and inheritances are generally aggregated within the relevant group threshold, so you need to keep a record of previous gifts and inheritances.
“For a family with substantial wealth, succession planning should not be something that happens after a death. It should be an ongoing process that considers what can be transferred now, what should be retained and what should ultimately pass through the estate.”
READ MORE
Owen Burke, partner, trust and estate practitioner and chartered tax adviser in the property and private client teams at Hayes Solicitors LLP, finds that most people tend to put off thinking about inheritance until later in life. “When people are younger, they can be busy with their working lives and raising children, and they may think that they don’t have anything significant to transfer.
‘While tax should not be a driver of decisions, parents in particular should be aware of the tax implications of their actions’
— Niall Pilkington, Davy
“It may be only when some significant event happens, whether that is impending retirement, the death of a family member, the need for nursing home care or a child buying a house that they sit down to focus on it and start looking at it in detail.”
The “most common misstep we see” is parents gifting excessively during their lifetime and leaving themselves short, and not being able to fully enjoy their hard-earned retirement, says Niall Pilkington, tax specialist and associate director at Davy. “In addition, while tax should not be a driver of decisions, parents in particular should be aware of the tax implications of their actions.
“For example, a lifetime gift of an asset may trigger capital gains tax (CGT) and stamp duty – neither of which would typically arise where an asset passes through a will. Parents can be surprised that these tax charges can arise even where the gift is made without receiving anything in return.”
One of the most common ways Charalambous sees parents helping their children is with a house deposit. “This can be a significant financial gift, so it is important to understand the capital acquisitions tax implications before transferring the money.
“A child currently has a Group A CAT threshold of €400,000 for gifts and inheritances from a parent. Previous taxable gifts and inheritances within the same group since 5 December 1991 are taken into account. CAT is currently charged at 33 per cent on amounts above the relevant threshold.”
There is also a small gift exemption of €3,000 per person, per calendar year, Charalambous continues. “This means a parent can give €3,000 to a child each year without it counting towards the child’s Group A threshold. Both parents could therefore potentially use their own €3,000 exemption each year. The exemption applies to gifts, not inheritances.”
The annual small gift exemption of €3,000 can be given to as many people as you wish and it does not affect their lifetime tax-free threshold, says Burke. “In addition, a person can receive the small gift exemption from as many people as they can. It only applies where the giver and the recipient are alive and does not apply on death.
“For example, take two parents with a son and daughter who each have a spouse or partner. The two parents can gift €6,000 to their son, his spouse or partner, their daughter and her spouse or partner. This would allow €24,000 to be passed from the parents to the next generation free of capital acquisitions tax. It does not have to be cash and can be shares in a company or other assets, or payment of liabilities for the child.”
‘If control is a concern, a family partnership can give parents control over how and when children access the asset, which can offer peace of mind’
— Owen Burke, Hayes Solicitors LLP
Every available CAT threshold should be utilised in a family, Burke continues. “For example, when drafting a will, if a parent wants to divide the estate equally between their three sons, each one-third share could be divided so that out of that share the tax-free amount goes to each daughter-in-law or partner and to each son’s children.
“Assuming a son has a wife and two children, this allows an additional €100,000 to pass into that household tax-free - €20,000 for daughter-in-law and €40,000 to each grandchild.”
Where an asset is expected to increase in value, there can be benefit in bringing forward the tax charges and transferring that asset, so any future appreciation occurs in the child or children’s name, says Pilkington. “This can mitigate any CAT which might arise down the line. If control is a concern, a family partnership can give parents control over how and when children access the asset, which can offer peace of mind.
“For parents with substantial estates or where there are vulnerable beneficiaries, including a trust through their will is often considered, however there are a number of personal and tax considerations on whether this is a suitable structure. We would always encourage open and honest conversations with those who might expect to benefit from your estate with a view to reducing the risk of unmet expectations or family disputes in the future.”
