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Gifting to your children? Make sure you don’t leave them with a big tax bill

Young man liable for €66,000 tax after parents ‘earmarked’ small-gift-exemption amounts for him in their own bank account

If you are gifting money to a child under the small gift exemption, make sure you keep a record of the transaction. Photograph: iStock

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Fiona Reddan
Tue Apr 16 2024 - 05:00

It may seem like a sound idea to earmark money in your account for future payment to a child. However, the ruling in a recent case by the Tax Appeals Commission does offer clear guidance to anyone hoping to avail of the small gift exemption to pass on money – without incurring a tax bill.

So what can other families learn from the case, and what mistakes should they avoid when passing on hard-earned assets to their offspring?

Back in 2022, a son who received almost €500,000 in gifts from his parents was hit with a capital acquisitions tax (inheritance or gift tax) bill of €65,835.

He had received a number of gifts from his parents – and great-aunts – over a period of time. These included: a €170,000 payment from his parents, which included €42,000 from his two great-aunts; a payment of €19,245, which it was said comprised gifts received throughout the man’s childhood to mark notable events such as his Holy Communion, Confirmation, birthdays and sporting achievements which had been put into An Post savings certificates and cashed in in 2018; and subsequent gifts worth €307,000.

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The tax bill arose because once his tax-free threshold of some €335,000 had been used up, the remaining gifts were subject to capital acquisitions tax (CAT). This comprised CAT of €49,500 on the latest of the gifts – €165,000 received in 2021 – and, secondly, CAT of €16,335 on the further gift by his parents of €49,500, which was used to pay the initial CAT liability.

It was argued by the family, however, that part of the money gifted to the son was done so using the small gifts exemption, which allows anyone to gift another person €3,000 tax-free each year (so up to €6,000 each year from two parents to one son). The man argued, when the case came before the Tax Appeals Commission, that no CAT should apply in light of the use of the small gifts exemption for sums that had been set aside for him by his parents and others since his birth in 1992.

In the end, the commission ruled that the gifts were not eligible for the small gifts exemption, and its comments should be noted by anyone hoping to avail of the scheme – and avoid any potential taxes.

Don’t leave funds in your own account

In the case, the father gave evidence that the money had accrued in the joint account he held with his wife, “earmarked” for his son to avail of the small gifts exemption. The father said the funds were “kept for him by me with our own money in our joint account”.

And how did he come to the amount to gift to his son and avail of the exemption out of all the money in the joint account?

He told the commission that it was “a very simple process”.

“When I was working it out, all I simply did was I went back to 1992 and I could see that I was able to give him (£)500. My wife was able to give him (£)500. At a later stage, I think it went up to 750 or 1,000. It was very easy to do a pen-and-paper exercise. So that is how I arrived at the €105,000, over […] the course of his lifetime from 1992 to 2017.”

However, rather than “earmarking” the funds in his account, counsel for the Revenue argued that what the father had done was a “retrospective exercise” when the Form 11 [self-assessment tax] return was filed in 2018, “whereby he sought to calculate how much could be given to the appellant without the charging of CAT”.

According to a summary of the case, the commissioner, Conor O’Higgins, said: “These payments were not made by the transfer of money to a separate account in the name of the appellant, as one might expect.”

The lesson here for other families is that separate accounts should be established in the name of the person receiving the gifts of up to €3,000 a year.

“The key point is that you can’t accumulate funds in your own account, because there has been no movement in the beneficial ownership of the asset. Beneficial ownership must change for the gift to occur,” says Marie Bradley of Bradley Tax Consulting.

Documentary evidence

Another issue outlined in the appeal was that the family bringing the case offered “no documentary evidence to corroborate the occurrence of this earmarking exercise”.

As Bradley notes, “The burden of proof rests on the taxpayer and so they must have documenting evidence to show that a gift was made.”

And what is a gift? Well, as Bradley notes, it implies a transfer of a beneficial interest in an asset from one party to another – which goes back to the earlier point of establishing a separate bank account.

It also means that documentary evidence of this annual transfer will be needed. Given that the most common form of this gift tends to be a cash payment, this evidence can take the form of bank statements showing money going from your account, to your child’s, or whomever you are gifting the money to.

The easiest way of showing this is to open a bank, credit union or An Post account in the name of your child. Another option is to open a bare trust account, such as with Standard Life. This allows the parent or grandparent, as a trustee, to determine how the money is saved/invested but, crucially, the money is owned by the child. The child will be entitled to access the money once they turn 18.

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If grandparents are paying school fees, for example, on behalf of a grandchild, they should keep note of this.

The absence of any corroborating documentary evidence whatever was found to be “fatal” in the case brought.

“It would have been an obvious and straightforward course to establish a bank account in the appellant’s name and transfer funds gifted to the appellant to that place. No cogent explanation was given as to why this was not done. Falling short of this, the father and his wife could still have made some contemporaneous record of their gifting of money. No such material was produced at hearing.”

Filing obligations

How did Revenue come to learn of the gifts in the case, you might ask? Well, in 2018, the son filed a Form 11 return on which he declared that he had received the sum of €170,000 in 2017. Along with the return was a document from the father, explaining that the sum of money comprised annual small gifts that he, his wife and his son’s two deceased great-aunts had made to him previously.

Not everyone will be obliged to disclose they have availed of the small gifts exemption.

According to a Revenue spokesman, if you file an income tax return, you must indicate whether you have received a gift or inheritance in the relevant tax year on the form.

Once the accumulated value of your inheritances/gifts reaches 80 per cent or more of the relevant threshold, you are obliged to file a gift or inheritance tax form (IT38) to disclose this even though no tax is yet due.

So, for example, if you are a child, such a requirement would kick in once you receive gifts and/or inheritances worth €268,000 from your parents (80 per cent of the €335,000 Category A threshold). Where the gift is from a grandparent or other linear relation to a child, the reporting threshold under Category B would be €26,000.

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It’s important to note, however, that gifts made under the small gift exemption are not taxable, and thus won’t trigger such a tax return.

“It is not necessary to take account of a gift that is exempt from CAT pursuant to the small gift exemption for the purposes of establishing whether the individual must file a CAT return on the basis that the 80 per cent threshold has been exceeded,” says the Revenue spokesman.

Consider the example of grandparents paying school fees. Availing of the small gift exemption, they will be able to pass on €6,000 a year to a grandchild. But what if the fees are €7,000 a year? “Anything over that, it eats into the threshold,” says Bradley.

This means then that the excess – ie €1,000 over a year, or €6,000 over six years – will go towards the child’s Category B threshold, which currently stands at €32,500.

Such issues can also arise in the event of death. When probate is sought, children will be required to provide information on previous gifts and inheritances they have received to determine to what extent – if any – tax-free thresholds have already been utilised.

While it’s important to ensure compliance with tax requirements when availing of the small gift exemption, it is a tax break that still should be taken advantage of to reduce eventual inheritance taxes. As Bradley says, “It is a very useful tool.”

If availing of it, her practical tip is to pick a day in the year (“a special day, such as a birthday or anniversary”) and pay the gift on this day every year.

Tax Appeals CommissionRevenue CommissionerstaxInheritance