The Small Gift Exemption has become a popular tool in recent years for parents that want to gift their children money, usually for a deposit on a house. You can gift a person up to €3,000 a year and it has no impact on future inheritance. This means that parents can gift a child up to €6,000 a year.
While the small gift exemption has been around for a long time, it has not been used as frequently as it is now. In the past, people just gifted their child the lump sum and said nothing. But people are getting more conscious of being tax compliant than previously. But what if your child is trying to get on the property market before you have started gifting them money?
You can still insist on using the annual gift exemption and they can wait. Say you are going to gift them €48,000 (purely because €6,000 divides into it cleanly). If you child is going to buy with someone else, you can gift their partner €6,000 as well, so the €48,000 can be gifted over four years.
But the price of property isn’t standing still. With current house inflation of 7.21%, where €48,000 got a 10% deposit on a €480,000 house today, it will cover 7.6% of a deposit on the same house in four years time which is then valued at €634,136😬.
Or you can gift them €48,000 today. The first €12,000 (€6,000 for your child and €6,000 for their partner) can be given as a small gift exemption. The other €36,000 is to be declared to the Revenue as a gift. It then comes off their Capital Acquisition Tax (CAT) threshold, which from a parent to a child is €400,000. That means when they get their future inheritance, they can receive €364,000 (at current thresholds) tax free as they have already used up €36,000 of their allowance.
Parents hate the idea of giving up some of the tax allowance that their child can receive in the future but let’s put things in perspective. Their need is now. They don’t want to wait four years. And do you think they will make better use of the money today or in 30+ years time when you are dead?
The CAT thresholds aren’t index linked, they change based on the political winds of the time. We have no idea what the thresholds will be in the future. But we do know that €36,000 in 30 years time will be worth less than it is today. Based on inflation of 2%, €36,000 in 30 years time has the same purchasing power as €19,874 today.
It may be more tax efficient to gift them money over a number of years so their CAT threshold isn’t impacted, but is it as impactful? You can’t say it is. This is a true case of not letting the tax tail wag the dog.
Steven Barrett
07 April 2025