Financial Advice

How to gift your child their house deposit tax free

Finding or funding the deposit for your first home is never easy and with deposit rates on the floor, the small-gift exemption for some parents may be an ideal way to help build up a fund that can be used by their children at some point in the future to buy their first home.

We outline here some of the details of the scheme that you may find of use.

Firstly What exactly is it?

With capital acquisitions tax of the order of 33 per cent and the tax-free inheritance threshold from parent to child down substantially from a high of €542,544 to €335,000, the small-gift exemption is one way parents can avoid potential tax bills. (source Irish Times November 2020)

The exemption means that someone can gift up to €3,000 to another person each year without any incurring any tax liability for the receiver.

It’s important to note that the person making the gift does not need to have a relationship with the recipient to avail of the tax exemption; however, it is typically used by parents to gift money to children or grandchildren.

Example: A  gift of €3,000 a year from each parent over 25 years will come to €150,000.  As a comparison, if you were to gift a child €150,000 as a lump sum when they were 25, it could either be given tax free but reduce the child’s overall lifetime  CAT allowance for their parents to €185,000, or it would be taxable.

Tax on €144,000 (allowing for the exempt €6,000 in that year under the small-gift exemption) comes to €47,520. It’s a significant sum to have to pay in tax and it can be avoided by paying that money over 25 years at €3,000 or €6,000 each year.

For families with significant assets, putting the money away each year as opposed to generating significant tax liabilities can make a lot of sense.

For those with expensive properties – say a family with three children and a house worth €1 million and other investments, may see it as a practical way of mitigating any future tax liabilities.

Important Steps to take

You must keep a record of the annual transfers in order to be compliant from a Revenue perspective and you will need to ensure that the account the money is going into is in the name of the child.

Accounts can be set up with Banks/Financial Intuitions,  Credit Unions or putting the money into a trust account which may also offer an investment vehicle rather than deposit-type savings.

Make sure you have adequate funds for your own needs first

With property so expensive parents can feel under pressure to help finance their childrens property purchase and €6,000 a year is a lot of money, which could be paying off your own mortgage or boosting your pension, so make sure that these areas are taken care of first.