Financial planning is all about allocating resources. Using a Section 73 savings plan to avail of gift tax relief is clever use of existing savings. This simply involves making the best use of the money you have. I expect everyone is interesting in minimizing taxes and maximizing cash-flow, for themselves personally, and their dependents, both now in the future.
Simply put there are only four things you can do with your money; Owe it, grow it, spend it or gift it.
Let’s dig a little further into the last option, gifting it. The dwelling house exemption loophole was tightly knotted in the 2016 budget. The dwelling house exemption now only applies where the following conditions are satisfied:
1. The house was the only or main home of the person who died;
2. The recipient of the house lived in it as their main home for the last three years before the person’s death;
3. The recipient does not own or have an interest or a share in any other house (including one acquired as part of the same inheritance);
4. That the house is your main home for six years after you receive the inheritance (though this is not relevant if the recipient is over 65).
When certain conditions are met a life assurance savings plan can be used to fund gift tax, via Section 73. This relief is particularly suitable in the event of gifting a rental property or second home, or the home that is not your primary residence. The effect of the relief is it avoids causing another taxable gift for the beneficiary. Whereas, if you gift the beneficiaries’ additional money to pay the gift tax bill, this will be seen by Revenue as an additional gift, and will increase the beneficiaries’ tax bill. The proceeds of the Section 73 plan can be used to pay the beneficiaries gift tax bill, and will not increase their gift tax liability.
Let’s take an example. A married couple has two properties valued at €400,000 each. They currently have a Net Worth in excess of €1.3m, are both over 60 years, and have two adult kids.
They wish to consider gifting one of the property’s to their daughter, not immediately, perhaps in 10 years’ time. Under current rules, this daughter would incur CAT of circa €30,000. This is based on rules stating she can receive/inherit assets of €310,000 from her parents before incurring CAT @ 33% on the surplus.
To fund this CAT liability, the parents could organize a (Section 73) savings plan, which would pay out €30,000 in over 8 years’ time. (This amounts to a modest €265 per month**). This is then used to clear the daughter’s gift tax bill. If the parents wished to gift the property without any liabilities, they would need to gift nearly €45,000 cash savings. Therefore, by organizing existing savings in the appropriate structure the family will have a tax saving of at least €15,000. It is expected the value of the property will increase over time also. The tax rate and threshold ceiling are also movable feasts.
Do you own a second property? Which home is your Principal Private Residence? Are you considering downsizing? In the above example should they gift both properties? What are the considerations? Do you have a ‘proper’ financial planner?
A financial plan should result in somebody bringing calm to your financial world. Let us know if we can help you further. Contact us.
* Section 73 of Capital Acquisitions Tax (CAT) Consolidation Act 2003 (CATCA).
** Assuming a 4% return on investment, after charges.
***We advise that your client seeks professional tax and legal advice as the information is given is a guideline only and does not take into account your client’s personal circumstances.
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