Did you know that a grandparent is entitled to gift up to €32,500 immediately to each grandchild without the grandchild incurring any Capital Acquisitions Tax (CAT)? Additionally, my favourite tax-efficient gifting mechanism is available to a grandparent – the €3,000 CAT-free gift, which can be made to each grandchild annually.
If your parents have a bit of cash (or if you are already a grandparent and you have a bit of cash), it is much more tax efficient for the grandchildren to share the money out now, while they (or you) are still alive.
Have a look: the €32,500 plus ten years of gifting €3,000 adds up to a substantial sum.
- 2017: €32,500 + €3,000
- 2018: €3,000
- 2019: €3,000
- 2020: €3,000
- 2021: €3,000
- 2022: €3,000
- 2023: €3,000
- 2024: €3,000
- 2025: €3,000
- 2026: €3,000
Total amount gifted tax-free to one grandchild: €62,500.
You could do this for each grandchild and, what’s more, your spouse could also gift €3,000 per year per grandchild, meaning each grandchild could receive €92,500 over ten years.
Consider now what would happen if you willed €92,500 to a grandchild. On inheritance, he or she will each incur a tax liability of €19,800.
Why have Revenue benefit from your wealth and generosity at the expense of your grandchildren?
There’s another reason to give when you’re alive.
“What better way to become the architect of your grandchildren’s future than by setting them up in life from an early age? Who knows, the extra money may be used to buy a home or provide funding for further education. It may even go towards setting them up in business.”
What if the children are very young? You will need a repository for all this money to go into until they reach at least the age of 18, and you will want that money to grow, rather than to lose value in a savings account.
Setting up a Suitable Investment Policy
Zurich Life Assurance plc has an investment structure designed to meet the needs of savings for children under the age of 18. The Child’s Savings Plus Plan is designed in such a way that you act as the policyholder, with each of your grandchildren becoming an assignee of the policies. This means you are custodian and manager of the policies until your grandchildren turn 18.
Investment Structure and Charges
A volatile investment fund will not serve your grandchildren’s needs well in the future. As such, I would recommend an approach that gives access to investment returns when markets are performing, but provides a floor on losses when markets are weak. This means that your grandchildren will get financial benefits if there is a strong market but they will never lose everything if there is a weak market.
Zurich has a full range of funds of this type. Pay attention to the fee structure, however.
- The insurance levy: Every life company is subject to a 1% insurance levy on entry. However, Zurich has a range of product structures. If you are going through a financial adviser that is lead by commission, it may get expensive. Ask the questions before investing. It may be possible to set this product up on a fee only basis, or one where the commission is structured in such a way that is deemed fair and equitable.
- Allocation Rate: This is the percentage of the money you want to invest that is actually invested. The allocation may be as low as 95%, which means that you are losing out on 5% from the word go. You want all your money to be invested so look for 100% allocation.
- Annual management charge: You should also be aware that there is an annual management charge on these kinds of policies. It is a percentage of the fund, which varies depending on who sets it up for you. Be aware that this charge can range from 0.75% to over 2%. An unscrupulous broker may opt for the higher charge, which means more money for him or her, and less for your grandchild. Don’t forget that although the difference between 0.75% and 2% may not seem like much, any management charge is reducing the potential gains of your fund. It may be more prudent to pay a fee to an adviser for setting up the fund, in return for a lower annual charge.
- There may be additional third-party charges. It is a murky area and you should ask your adviser about the charging structure. Yes, the adviser needs to get paid for his or her work, but you have a right to know how much and how.
- Exit Tax: Be aware that the gains made through this kind of policy are subject to exit tax (currently 41%) but this is expected to reduce in the coming years. So if the fund grows by 10% in 10 years and little Mary reaches 18 and wants to cash out the fund to go to college in the States, she will have to pay 41% of the gross return
I mentioned two weeks ago that the Tax Strategy Group engaged by government has made recommendations on heritance tax exemptions and rates. If the government decides to tweak Category B – gifts to grandchildren – on Budget Day on October 10th, the scope to gift money to grandchildren may be restricted.
So get moving on this now if it is something you or your parents have been thinking about.
If I can help you with this issue, don’t hesitate to get in touch.