Small gift exemption avoids Revenue rules on CAT aggregation

I was very interested to see your column on drip-feeding inheritance without paying liabilities. I have power of attorney for my mother and was pondering this issue myself.

I have two sisters and my mother has willed everything to us.

I am concerned about the amount of tax we will be liable for when that time comes and was looking for a way to avoid it.

I spoke to my solicitor who told me that any gifts would be aggregated at the time of inheriting and taxed to include the gifts. After reading your column, it would appear that this is not the case unless the gifts exceed €180,000.

However, you do not specify categorically if this is the case. I’d be grateful if you would be so kind as to let me know if any gifts will be aggregated at the time of inheritance.

Ms LM – email

There are a couple of issues here. First, the issue of drip-feeding refers to the annual small gift exemption of €3,000 which anyone (including your mother) can give to anyone else – yourself, your sisters, other relatives and even strangers – without it ever being taken into account in assessing liability to gift or inheritance tax.

For avoidance of further confusion, it is not the case that the maximum payable in aggregate in any one year is €3,000; that is the limit payable by Person A to Person B.

So, with three children, up to €9,000 could be gifted equally between them under the small-gift exemption.

Sums paid under the small-gift exemption are not subject to aggregation: they never enter the picture in terms of assessing liability to tax.

Clearly, if you are operating under power of attorney, you will have to satisfy yourself that such payments would be in line with your mother’s wishes and that they do not disadvantage her.

That “small gift” can be paid each year to the same people, or others.

The €180,000 threshold is something else entirely, and it is certainly not a means of sidestepping the issue of aggregation.

The threshold on gifts and/or inheritances passing between a parent and a child (other than the small-gift exemption) is €225,000.

And yes, as your solicitor told you, these are aggregated, ie any gift and/or inheritance already received from your mother or father to each of you is totted up to see if you exceed the threshold. If it does, you are liable to capital acquisitions tax which is levied at 33 per cent.

For clarity, this does not just happen at the point of inheritance from your mother’s estate. If you exceed the threshold earlier, it kicks in at that point.

The importance of the €180,000 figure is that it triggers a requirement for you to let Revenue know you have reached 80 per cent of your Category A threshold – the threshold governing gifts and inheritances between parents and children.

You won’t be liable to tax until you pass the €225,000 but it puts you on the Revenue radar so to speak.

If, once you inherit from your mother, you still have not exceeded the €225,000 threshold on aggregated gifts and inheritances from a parent, you will not have any tax liability.

Essentially, if you wish, you can use the small gift exemption to somewhat reduce your eventual exposure to tax when your mother passes on. Does 65-year-old pay PRSI on rental income? I am a retired civil servant who turned 65 in mid-January. I do not pay PRSI on my pension.

I also have a residential rental property. Am I exempt from the new 4 per cent PRSI levy on rental income.

Mr TD – email

As you are clearly aware, the Government extended PRSI on all unearned income – such as rental income – to the PAYE sector at the start of this year. Before that, it applied only to the self-employed.

Under the provisions, anyone between the ages of 16 and pensionable age is liable to pay 4 per cent PRSI on such unearned income, assuming that the income from such sources is above the threshold of €3,174 in any given year.

The key point in your case is the term “pensionable age”. While you may have retired in January, that does not automatically exempt you.

Equally, while most of us still assume that the pension kicks in at 65 in this State, this is not the case.

You may get your occupational pension from your employer at 65 but the State pension does not get activated until you turn 66.

Until this year, something called the State Pension (Transition) bridged the gap for people who had retired at 65 but had not yet turned 66 in order to avail of the contributory or non-contributory State pension. Previously that had been known as the Retirement Pension because it applied only to people who had actually retired.

So, while you could actually work from 66 years of age on, if it suited you, and still receive the State pension, you could not receive the transition pension payment unless you were actually not working for that one year.

Anyway, the Government abolished the transition pension from the start of this year and the State pension now kicks in at“pensionable age”, which is 66. That figure will rise to 67 in 2021 and to 68 in 2029.

The bottom line is that you are going to be liable to the 4 per cent charge this year and next until you turn 66, assuming you earn over the threshold of €3,174 from rent or other unearned income in each tax year.

If you are liable, you will have to file a tax return under the Pay and File system with Revenue. Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.