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29 Oct, 2021

New Tax implications for receiving gifts and inheritance

Beneficiaries must be aware of gifts and inheritances of new tax implications.

Up to now, for Capital Acquisitions Tax purposes, the value of gifts or inheritances of free money has been calculated based on the interest rate that the money involved would have earned if it had been on deposit. However, in the future, under changes introduced in the Finance Bill 2021, the calculation will be based on the cost of borrowing an equivalent amount on the open market.

Our Head of Tax, Declan McEvoy said; “A change in how the value of gifts or inheritances of free money is calculated for Capital Acquisitions Tax purposes will have implications for anyone benefitting from these arrangements. The new valuation method is likely to result in an increase of around 3 per cent in the calculated value of gifts or inheritances of free money. This is because while deposit interest rates have been very low in recent times, the average mortgage interest rate is close to 3 per cent.”

For example, a child is entitled to a lifetime tax-free threshold of €335,000 in respect of gifts and inheritances taken from his or her parents. Where the aggregate of the gifts and inheritances received by a child from a parent exceeds €335,000, only the excess is subject to CAT tax.

In addition to this €335,000 tax-free threshold, the first €3,000 of gifts to a child in any year is exempt from CAT under the annual small gift’s exemption. Two parents can make gifts to a child to the value of €6,000 in any year free of CAT.

The effect of the finance bill can be illustrated where say the cheapest loan interest rate available on the open market is 3 per cent.

A child gets a loan of €100,000 from a parent and the interest is foregone. The gift element is €3,000 and this is covered by the small gift exemption. A loan of €200,000 from both parents will also be covered.

However, a loan in excess of the above amount will eat into the Tax-free threshold that a child can get.

If over a 10-year period a child has a €350,000 interest-free loan from a parent, then the annual interest gift is €10,500 at 3 per cent interest. The annual small gift tax allowance is €3,000. Therefore, over a ten year period, a child has eaten into the tax-free threshold by €75,000.

If a child had used up the allowance before the gift was received, then they would have an annual tax bill on the €7,500 of €2,475 and a return would need to be completed annually for this.

The disposer of the gift or property must be aware of this change and the tax consequence, with the disposer being the person transferring the property. Another measure in the Finance Bill will allow Revenue to seek a tax return from the ‘disposer’ of gifts of property where the property concerned is subject to Agricultural Relief or Business Relief claims. This is on top of the requirement in Finance Bill 2020 to make it mandatory to make a gift or inheritance return Tax Return (IT38) where relief is claimed.