Trying to maximise inheritance using the small gift exemption rule

I read your column on tax and inheritance recently and was intrigued. Similar to that gentleman, I am potentially in line to receive over the €335,000 limit at some stage in the future. I have been lucky enough to be gifted €50,000 to help get me on to the property ladder.

My question is could my father give the maximum €3,000 to, say, eight different people under the small gift exemption – then they transfer me the money (€24,000) and do the same thing next year, while avoiding a reduction in my future inheritance?

Mr B.A.

I can certainly see the attraction of such a scenario, but the answer is a resounding no. At least not in the same year. There is a process where you could set up such a structure but there would be a minimum three-year lag in you receiving the cash.

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The small gift exemption is a very valuable relief that allows people to reduce their assets without impinging on the inheritance tax threshold of the recipient. It allows any person to give any other person up to €3,000 in any calendar year without tax implications for either party.

It is most often used within families for parents and grandparents to pass assets on to next generations over time, but it is not limited to that. You could give that amount to an elderly neighbour, a friend, or even someone you met in the street, with no tax bill worries.

The only requirement the Revenue Commissioners have is that the benefit of the exemption applies specifically to the person receiving it. So, in your example, if your father gifts €3,000 to eight people who, in turn, gift it to you in that same year, Revenue will consider that your father has gifted you the €24,000 in each year and slice a further €21,000 a year off your tax-free threshold on any eventual inheritance.

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In your case, you were as you say fortunate enough that your family could gift you €50,000 to allow you to buy your first home. In my view, that’s a great use of an intended inheritance for those who have the resources to gift the money during their lives – on the basis that now is the time when it is most useful to the recipient.

If you have a partner, your father could gift each of you €3,000, which would then put €6,000 into your ‘family pot’

However, it will diminish what you can inherit tax-free later on.

In your position, you can receive €3,000 from your father in any one year and, if she’s alive, another €3,000 from your mother – ie, the money may come essentially from the same financial pot – but that is all. You could separately receive €3,000 from, say, your siblings, but not simply by way of your father giving them €3,000 to pass on to you in the same calendar year.

The practice you are considering is called gift-splitting and it is addressed specifically by the law – the Capital Acquisitions Tax Consolidated Act (Catca) 2003 – in this case, in Section 8(1), which covers all gifts and inheritance, not just the small gift exemption.

It does allow for a situation where a person makes a gift to someone else with the specific intention that the recipient then gifts that same sum to another person – your scenario of your father gifting eight people who would then gift you. However, in order for the onward gifting by the recipient to you to be free of tax implications, they would have to wait three years before passing on the money to you. Otherwise it is deemed to come to you direct from your father.

If they do – and if they make no other gifts to you in the year when they do eventually gift on your father’s €3,000 cash – it would appear that you could use this structure to “manage” the passing of part of your father’s estate to you.

However, given the three-year lag, such plans might be overtaken by events. Section 8 also provides that if your father dies within two years of making a gift to someone with a view that they pass it on to you after three years have passed, that money becomes an inheritance to the person who received it.

They can still gift it to you, of course but it will now be counted as part of their lifetime tax free threshold as an inheritance from your father, not a small exempted gift. If they are not family, that could eats into their modest category C lifetime tax free threshold of €16,250 and they may well be inclined to keep the money on that basis.

There is an exemption to Section 8(1) for what Revenue calls genuine cases. In their guidance notes, they give the example of a gift to a married child of a house on which, if the child subsequently seeks a mortgage for any reason, such as building an extension, the bank requires the property to be put in joint names within three years of the gift being made. As long as Revenue is happy the transfer into joint names was at the insistence of the lender, they will not interpret the move as a gift of half the house from your father to you wife (who as a “stranger in blood” to your father would only enjoy the lowest category C tax free threshold on any gifts from him).

Speaking of spouses, or civil partners, your father could gift each of you €3,000 under the small gift exemption, which would then put €6,000 into your “family pot”, as you and your partner could jointly use the funds for whatever you choose.

Anything above the €3,000 threshold that you beneficially receive from your father (or anyone else) in a single calendar year will further chip away at your €335,000 category A tax-free inheritance threshold covering gifts and inheritances from a parent to a child.

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. This column is a reader service and is not intended to replace professional advice