I am in a position to gift my daughter the €3,000 allowed annual tax-free gift. She is living and working in London. Are there any UK taxes due on this gift?
SF
The small gift exemption is one of the great unsung reliefs under the Irish tax system. It allows anyone to give anyone else up to €3,000 a year without any tax implications.
Clearly, the person making the gift will have already paid income tax etc on it but the recipient does not have to worry about tax at all.
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So two parents could each give €3,000 to each of their children – and indeed also to their children’s partners – with no tax headaches for the recipients. You can even gift money under this measure to perfect strangers. And there is no limit on how many people you benefit with such gifts.
The only limit really is the amount of surplus income you have that you are comfortable passing on, knowing that you cannot simply go cap in hand to claim it back if times get tougher.
For younger adults jostling the costs of new jobs, travel, first homes or young family, it can be an invaluable financial aid.
But you are quite correct to check what the situation might be for someone living abroad. Rules can differ wildly between one jurisdiction and another – even between us and the UK where, in general, there is so much shared heritage on issues such as the tax code.
The last thing you want to do is try to lend your daughter a helping hand only to leave her with a tax bill.
As it happens, the system of taxation on gifting in the UK is very different from here. The key difference, as with all areas of their inheritance/gifting process is that it is the donor who is liable to tax, not the beneficiary. In Ireland, it is the beneficiary who becomes liable for tax once their lifetime tax-free limits are exhausted.
Someone resident in the UK does not need to declare gifts of cash and are not liable to tax personally on such gifts. Obviously, if they go on to invest the money themselves, they will be liable to whatever tax regime applies to that investment.
For the donor, there are all sorts of overlapping rules and limits under UK law. Fundamentally, the issue is how long after the gift is made do you die.
First, there is a general annual exemption on the amount you can give away in any year without it having any impact taxwise on your estate. However, it is modest to say the least – £3,000 (around €3,435) in any one tax year. That is not £3,000 per beneficiary but £3,000 spread across all beneficiaries. It can all go to one person or be spread across a number of them.
If you do not use the full £3,000 in one year, you can carry it forward to the next year but no more than that. If it is not used in full in the next year, the relief disappears.
Just to complicate matters, alongside that £3,000 annual limit, there is a small gift provision of £250 a year that you can give to as many people as you like. However, none of the people in receipt of the £250 can also benefit from any of the separate £3,000 annual sum.
And if you give anyone more than €250 in one or more gifts over the course of the year, the entire sum may be assessed for tax against your estate, not just anything over the £250 limit.
As if that was not complicated enough, there are yet more separate payments that can be made at a wedding.
In that case, a parent can give up to £5,000 to a child without worrying about tax. A grandparent, or great-grandparent if you are lucky enough to have one, can give up to £2,500 and anyother relation or friend can give up to £1,000.
And in this case, unlike the £250 small gift provision, giving more than the relevant limit does not make all the gift potentially taxable – only the amount above the limit.
They do like their complications over at His Majesty’s Revenue & Customs (HMRC).
And to make things very “grey”, HMRC will also allow any gifts that are regular payments to another person from your normal income which do not affect your normal standard of living. Good luck tying that one down if you are a tax inspector.
The tax liability in all the cases above depends on when you die. If you survive more than seven years after the gift is made, no tax liability arises.
However, if you die within the seven years, the amount gifted over the specific exemptions is added back to the value of your estate for tax purposes. And how much tax it will be subject to varies according to how far back within those seven years it was made.
If the gift was made less than three years before death, it is subject to the full inheritance tax rate in the UK, which is higher than it is here – at 40 per cent.
That falls to 32 per cent between three and four years, 24 per cent from there to five years and then to 16 per cent and 8 per cent respectively up to six and seven years ago.
You can see how this could all be a right headache for executors.
The good news for you is that this applies only if you are based in the UK, which you clearly are not.
As such, there is no tax liability either for your daughter or for you on this €3,000 gift. In fact, it appears you could make even larger gifts to her without falling foul of the tax law in either jurisdiction.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
