A recent ruling by the Tax Appeals Commission reinforces the importance of planning correctly when passing wealth to the next generation. As a result of the Tax Appeals Commissioners ruling , the 32 year old ‘child’ had to pay €65,835 in taxes to Revenue. The Tax Appeals Commission report indicates that the child received numerous gifts, totaling almost €500,000, from his parents and relatives to celebrate key milestones and events such as his communion. The Appellant’s father accepted in submission that there was some difficulty with regard to the precise calculation of the amount received in respect of birthdays, communions, confirmations and other similar events but said that the figure he arrived at was conservative and should be accepted by the Commissioner. When questioned, the child's father, who is a solicitor, notes that each year he would take account of what the small gift exemption was and he would 'earmark' these funds in his accounts for the future benefit of his child. When gifts from family members were given, the child's father would do the same and earmark funds in his account. However, as the money was not transferred to the child at the right time and in the correct manner, tax was due on a significant portion of these gifts. For anyone who would like to read the case in full, details can be found by clicking HERE. In Ireland Capital Acquisition Tax (CAT) is generally due on taxable gifts and inheritances. The rate of CAT is currently 33%. In this case had the father and mother taken some steps, they could have avoided this large CAT bill. For example, current CAT rules allow a father and mother gift a child up to €335,000 before any CAT is payable to Revenue. In addition, every year they can also gift €3,000 each (€6,000 in total) tax free. While not as generous, similar rules apply for Grandparents, wishing to help grandchildren. In theory, a Father and Mother could gift a new born child €335,000 when they are born and then an annual payment of €6,000 every year for 25 years. The total amount of money gifted over the 25 year period is c. €500,000, similar to the case above. If they invested this money on the child's behalf and earned a 5% annual return net of charges and taxes, due to the magic of compounding, the child would be left with a lump sum of €1.5 million after 25 years. There would be no CAT due on the €1.5m. Obviously not everyone necessary wants their child to have a lump sum of €1.5m at 26 years of age, or, can afford to gift a new born €335,000. However, the benefits of having a plan and taking professional advice irrespective of the amounts involved should be clear, especially when compared to the Tax Appeals Commission Case mentioned above. Part of any good financial plan should incorporate steps that can be taken to mitigate potential taxes both now and in the future. If you would like to discuss the issues outlined in this note, please email Team@Distinctwealth.ie or call 01 5392601. shane mcinerneyShane is a Director of Distinct Wealth Management with nearly 20 years experience advising Families and Institutions in Ireland on financial planning, investments and pensions. He is a Qualified Financial Adviser and a Chartered Tax Adviser. This information in this article is based on Distinct's understanding of current tax legislation in Ireland and is subject to change without notice. It is intended for information only and not as a substitute for professional advice. Distinct does not provide tax advice. You should consult your tax adviser for the rules that apply in your individual circumstances. The value of your investment may go down as well as up and you may lose some or all of the money you invest. Past performance is not a reliable guide to future performance. Comments are closed.
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