In a time when the Capital Acquisition Tax (CAT) Group Thresholds are decreasing, parents are seeking more tax efficient methods of distributing their wealth amongst their young children.
Under the current tax regime, children may avail of the Group A Tax Free Threshold for gifts taken after 07th December 2012 and receive up to €250k from their parents without liability to CAT. Anything received over and above this amount is taxed at the current gift tax rate of 33%.
An effective method of passing funds to children with decreased liability to CAT is by setting up a Bare Trust in their favour. As children under the age of 18 are legally incapable of holding property in their own right, funds can be vested in trustees appointed on their behalf by a Bare Trust Deed. A Bare Trust is similar in nature to a nominee account. Funds are added to the trust fund in the names of the trustees but are at all times treated as belonging to the children.
Under this bare trust scheme, each parent may utilise the annual small gift exemption and contribute €3,000 to the trust fund every year without the child beneficiary incurring CAT. Each child may therefore receive €6,000 tax free annually from their parents combined. If this is received every year until they reach the age of 18, the child will have received €108,000 without any liability to CAT.
A further advantage is that these funds will not count towards the child’s tax free threshold. It should be noted that this annual gift and the fiscal benefits thereof may continue indefinitely throughout the child’s life. In the alternative, non cash assets such as shares up to the value of €6,000 could be added annually to the trust fund.
The option to contribute €3,000 tax free each year to the fund is not limited to parents. Grandparents, aunts & uncles, godparents and others may similarly contribute up to €3,000 annually. The net result is that the child, by the age of 18, may have amassed significant wealth without liability to CAT and without having affected his tax free thresholds.
It is important that this Trust fund is set up correctly, the right trustees are nominated and any wishes abut drawdown are dealt with i.e From a parent’s perspective, this may be far from ideal, as the child would have access to significant sums of money at a relatively immature age.
We have experience in setting up this type of arrangement and believe they are a great way to pass inheritance to your children or grandchildren if your estate will be leaving in excess of the current thresholds ( below ) . Contact firstname.lastname@example.org for more information
Currently the inheritance tax thresholds are as follows:
Group A: €225,000
Applies where the beneficiary is a child (including adopted child, step-child and certain foster children) or minor child of a deceased child of the disponer. Parents also fall within this threshold where they take an inheritance of an absolute interest from a child.
Group B: €30,150
Applies where the beneficiary is a brother, sister, niece, nephew or lineal ancestor or lineal descendant of the disponer.
Group C: €15,075
Applies in all other cases.