Small Gift Exemption / Inheritance Tax Savings Plans

Benefits Summary

2 variations of Small Gift Exemptions Savings Plans

There are 2 types or variations of these savings plans, each with its unique set of terms and setup requirements.

STEPS INVOLVED IN SETTING UP YOUR AVC

In order to set up your AVC, the following steps are required;
  • Sign and send back/submit a AVC Application form along with your Anti-Money Laundering documentation.
  • The application along with your Anti Money Laundering documents are then submitted to the chosen AVC Provider to be processed and a policy number created on their system. This can take between 2 to 4 weeks.
  • If lump sum AVC contributions are being made you will be required to either transfer it yourself from your own personal online banking account.
  • Or go into your bank/credit union and request them to transfer your funds to AVC Provider’s bank account
  • You will also receive a PIN code (separately) in the post which will enable you to log into the AVC providers online system. Here you can view your account balance, change fund choice, stop/pause/increase your contribution etc.
  • The AVC provider will also send a tax certificate to the Revenue at this stage. This document is proof that you are making AVC contributions and are now due tax relief back on same. Your tax credits will then be altered by them and the all tax relief will be received within weeks.

AVC Contribution and Tax Relief

AVC – Regular Contributions
  • When regular (fortnightly/monthly) contributions are being paid into AVC’s, the tax relief is also received simultaneously. Regular contributions can be made in 2 ways
  • By Salary deduction -from your payslip Non Salary Deduction – debited from your personal bank account.
  • With Salary deduction method, the AVC contributions are transferred to the AVC before the income tax is subtracted. This is called getting tax relief at source.
  • With the Non Salary Deduction method, the Gross AVC premium is debited from your bank account each month. The tax rebate (usually 40% of the AVC premium) is added back to your take-home pay on your payslip on a monthly basis.
  • There is no real difference between the 2 methods. You are receiving your tax relief either way. We would always recommend the non salary deduction as it give you much more flexibility in relation to;
  • Making lump sum contributions Choosing AVC provider Better fund choice Control over your contributions (stopping/restarting/increasing/decreasing them etc)

Who are small gift exemption savings plans most suitable for:

These types of plans are typically used and most suitable for the following scenarios:

  • Parents/grandparents who wish to gift cash assets to their children / children
  • Godparents/uncles/aunts setting up savings plans for their godsons/ goddaughters/ nieces / nephews when they are born to accumulate an fund for their third-level/college education fees.
  • A group of relatives who wish to set up a savings plan for a child/grandchild whose parents are deceased
  • High net worth individuals who wish to gradually pass on their cash assets while they are still alive to their children/ grandchildren/ nieces /nephews without affecting the beneficiaries’ Capital Acquisition Tax (CAT) lifetime exemption limit threshold.

Who provides these savings plans?

Most insurance providers in Ireland provide these plans, namely Irish Life, Zurich, Aviva, New Ireland, and Standard Life.

It is always recommended to compare each provider on the following.It is important to speak to your Financial Advisor before choosing any provider.

Fees & charges

Allocation rate

Set up fees

Annual management charges

Customer service reputation of the provider

Investment choice and performance of providers’ funds

Where are these funds invested?

Example 1

To help explain these types of savings plans and their benefits, below are 2 case scenarios of when these are typically used.

Grandparents gifting to their grandchild

Tom and Louise have recently become grandparents of Oisin and have decided to set up a children’s small gift exemption savings plan for him.

Under revenue rules, they can both gift him €3,000 per year and still avoid any capital acquisition tax liabilities for Oisin, either now or in the future. This gift doesn’t affect or reduce his €40,000 lifetime Capital Acquisition Tax exemption threshold limit.

They set up this tax-efficient savings plan and started contributing €500 per month from one of their joint bank accounts.

Tom, the trustee of the policy, was chosen to manage the investments until Oisin is over 18. Oisin can take over the management of this savings plan at this stage. However, until then, he cannot access or withdraw any of these savings.

Tom decides to invest the savings plan funds in a Balanced multi-asset fund with a main Insurance Company that provides these plans.

This fund is classed as medium risk and has a 20-year track record of generating a net return of 7% per annum

If Tom & Loise continue contributing €500 per month and invest in the
balanced multi-asset fund until Oisin’s 18th Birthday, generating a net
average annual return of 7%, the compounded value of Oisin’s fund on his 18th birthday will be close to €160,000.

All these funds will be exempt from the Capital Acquisition tax, and Oisin
can use the savings pot to pay for his college education or indeed help him with a deposit for his first property purchase when the time comes.

Example 2

High net worth Individuals gifting significant cash Assets to family members over time tax efficiently

John is a Business owner and has a Net worth from all assets of circa €3 million. After chatting to his financial advisor, he has been made aware that on death, his 3 children will be faced with a Capital Acquisition tax bill of over €600,000. To pay for this tax bill, they may be forced to sell the family business or the family home.

John has some cash investments and has decided, as part of his estate planning strategy, to gift this cash to his 3 sons and his 10 grandchildren while he is still alive.

John can transfer €39,000 annually to his family and not trigger any Capital Acquisition tax liability or indeed reduce the CAT lifetime limit exemption of €400,000 for each son and €40,000 for grandchildren.Over 10 years, John will have gifted €390,000 to his family tax-free. If he invested these funds, all compounded returns are also exempt from CAT.

To find out more about a Small Gift Exemption Savings plan, enquire now.

FREQUENTLY ASKED QUESTIONS (FAQ's)

Q1. What is Estate Planning?

Ans:  Estate planning is a process that involves preparing for the future, particularly concerning the management and distribution of assets after a person’s death or in the event of their incapacity. It encompasses various aspects, including creating wills, trusts, powers of attorney, and living wills to ensure assets are distributed as desired and to minimise tax liabilities.

Q2. What is Capital Acquisition Tax?

Ans:  CAT is a tax on gifts and inheritances. Your client’s beneficiary can receive gifts and inheritances up to a set value over their lifetime before paying CAT. Gifts and inheritances received below this threshold over the beneficiary’s lifetime are not subject to CAT. Generally, Group A includes children of the disponer. Group B includes other relatives of the disponer, such as grandparents. Group C includes everyone else. For more details, see CAT groups and group thresholds (revenue.ie).

Q3. What is the Annual Gift Exemption?

Ans:  Under the Small Gift Exemption, Exempt from gift tax. This means an individual can receive multiple €3,000 giftys from different people within the same year, all exempt from Capital Acquisitions Tax (CAT).

Q4. What is a Bare Trust?

Ans:  A Bare Trust is a type of trust that allows money to be paid by a Settlor(s) to a trust fund managed by Trustees on behalf of the Beneficiaries of the trust. The Settlors and Trustees are often the Beneficiaries’ parents, grandparents, or other relatives.

Q5. What tax is payable on returns generated from Standard Savings plans in Ireland?

Ans:  Exit tax is payable on all returns made from Small Gift Exemption Savings plans in Ireland. The current rate is 40%. If, by year 8, the savings policy has not been encashed, the exit tax payable on the returns made is automatically deducted from these savings plans by the relevant insurance companies and subsequently paid over to the Revenue on your behalf.

🔍 More Helpful Guides & Advice for SMALL GIFT EXEMPTION

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