Weddings, rent and houses: tax and gifts to children?

While many people have an understanding of the potential tax liabilities of leaving the family home to children, and the various thresholds etc that arise, they can be less clear on other possible tax charges.

Did you know, for example, that there could be a tax liability on the gift of a honeymoon? Or what about a deposit to help a child buy a home? And what about an adult child living at home – is the use of free broadband, laundry and nightly dinners deemed to be a taxable benefit?

Here we take a look at Revenue’s interpretation of gifts and payments within families.

Weddings and family functions

In the past, it was typically the bride’s parents who would foot the bill for a wedding breakfast. These days, it is likely that the parents of both spouses will contribute to the cost, as well the couple getting married themselves. Given an average cost of €36,000, according to figures from wedding website One Fab Day, this is no surprise.

But should those getting married pay tax on the generous contributions made by their parents?

Revenue says no, noting that it takes the view that “this is the expense of the parent rather than a gift to the child. Therefore, there are no gift tax implications”.

It says that this view extends not just to the cost of food and drink at the event “but also to all of the costs associated with the occasion”.

Where it takes a different view, however, is where munificent parents offer to pay for a honeymoon or make a significant gift such as a car or a home to the happy couple. Even though such gifts may be made in association with a family occasion, such as a wedding, these are still seen as gifts for gift tax purposes, Revenue says.

Of course, if the gifts don’t exceed the €3,000 small gift exemption (which could be €6,000 per child from two parents), no tax will apply.

Education costs

Children are expensive and just because they turn 18, it often doesn’t make them any cheaper. In fact, that is when the costs can really start to bite, given third-level registration fees of as much as €3,000 a year, never mind books, rent, transport and living costs.

Fortunately, however, parents don’t need to worry about any of the potential tax implication of supporting a child through third level. According to Revenue, costs associated with attending college are deemed to be “normal and would be exempt from gift tax”.

Similarly, if a child remains dependent on their parents for physical or mental health-related issues, then the “support, maintenance or education” of this child would remain exempt of tax.

Given the high levels of rents across the State, a route sometimes taken by those fortunate enough to have the funds or access to them, is to buy an apartment or house in an urban area where their children can live while attending third level. The property can then be used as an investment once they move on.

But is this benefit of the use of a home rent-free, taxable?

Well, according to Revenue, if a child is not more than 25 years of age and they’re attending third level, the benefit is a “normal and reasonable provision”, and is thus, exempt from tax. Above that age, the rules change.

Adult children

It is not so unusual any more for an adult child to be living at home. Figures from Eurostat show that over two out of every three young Irish adults aged between 25 and 29 were still living at home in 2022. This compares with a figure as low as 4.4 per cent for the Nordic countries.

While such children may be paying rent to their parents, there is still likely an additional benefit for them of living at home and not paying associated costs, such as heating, broadband, repairs, food etc. But is this a taxable benefit?

According to the Revenue’s guidance, no.

“This does not give rise to a gift by the owner of the property to the family member,” it says. So there is no need to try to attribute a value to “bed and board” provided by parents to a child – including that child’s spouse or partner.

Home deposits

But if the bank of mum and dad is used to help a child buy a home, a tax bill may be likely.

As Revenue notes, “a gift to a child of a deposit for a house in excess of the annual small gifts exemption of €3,000 is subject to CAT.” That’s capital acquisitions tax, better known as gift tax or inheritance tax.

There is no obligation on a beneficiary of a gift to spend it in the year it is received. Gifts can be accumulated by the child after receipt to meet future expenditure

—  Revenue

Of course, tax-free exemptions also apply, which means that the gift can be made tax-free but it will eat into a child’s lifetime tax-free exemption, which currently stands at €335,000.

However, with a little bit of planning, this may be avoided. Availing of the small gifts exemption, for example, could see parents gift a child €6,000 tax-free each year – €3,000 from each parent. If this is done over five years, a gift of €30,000 could be made without impacting on the child’s tax-free thresholds.

As Revenue notes: “There is no obligation on a beneficiary of a gift to spend it in the year it is received. Gifts can be accumulated by the child after receipt to meet future expenditure, eg to meet a deposit on a house.”

Of course, the issue with this is that once the €6,000 payment is made to the child, they may not save it for the intended purpose of a deposit.

Holidays and cash

Any cash payments made to a child might come into the sphere of a taxable gift (ie count towards a threshold), unless they come within the small gifts exemption.

While this may be understood, the position on other taxable gifts might surprise. Take the family holiday, for example. According to Revenue, gifts, in the form of a holiday to an adult child are seen as taxable, once they exceed the small gifts exemption.

So a trip to Australia, the Far East or a safari in Africa, or a ski trip plus a summer holiday, might exceed the €3,000 from one parent/€6,000 from both, are permitted tax-free under the small gift exemption each year.

Any excess would be set against a child’s tax-free threshold. For example, if a 14-night trip to Thailand cost a parent more than €4,000 for a child, the €1,000+ in excess of the €3,000 exemption will reduce the child’s tax-free threshold, as the table shows.

In practice, one wonders how many families would take this into consideration when planning trips of a lifetime.

Gift or loan

If you are fortunate enough to be able to gift a house, or land, to your children, bear in mind that doing so will certainly give rise to a tax obligation.

As Revenue notes, the purchase of a house for a child would not be considered part of the “normal” expenditure of a parent “regardless of the financial means of the disponer”, and thus, would not be exempt from gift tax.

As our table shows, parents could avail of the small gift exemption to defray the potential tax bill by €3,000 or €6,000. But, after that, the value of the house/land will be used to reduce the child’s tax-free threshold.

And if it exceeds the threshold, as shown in the table, a CAT bill will arise.

“One way of approaching it is, rather than gifting cash, you could give a loan to your child,” says Alan Murray, a tax partner with Mazars, adding that this won’t provoke a tax issue on day one. The only “gift” might be the interest you may not be charging your child on the loan (based on the prevailing bank deposit rate rather than the lending rate).

If CAT rates fall, or thresholds rise, by the time the loan matures, the child will do better rather than if they had paid CAT upfront – and they have also enjoyed the use of that money over the term of the loan.

However, he cautions that any loan agreements must be done properly.

“It needs to be documented properly, and it has to be a proper loan, and there must be an expectation of repayment,” says Murray.

But what about if the child continues to live rent-free in the apartment initially bought for their use during their years in college, as mentioned above?

While no taxable benefit may have arisen while the child was in full-time education, this is not the case for an adult child.

Revenue gives the example of a 30-year-old daughter, who is given the use of a house, worth €1 million, indefinitely. Given an annual rental value of some €36,000, the free use of the house should be treated as a gift, “equal to the annual rental value each year (less the annual small gift exemption of €3,000)”.

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In the above example, a gift of €33,000 would have been seen to have been made, which is set against the child’s tax-free threshold. If two or more children share the house, then the value of the gift would be shared.

And what if the child ultimately inherits the house?

While there is an exemption to avoid CAT on such transfers, known as the dwelling house exemption, there are as Murray notes “a lot of conditions there” which must be satisfied in order to claim it.

These include that the child lived in the house as their main home for the three years before the inheritance; the child doesn’t have an interest in another property; and the child lives in the home for six years after the date of inheritance.

Critically, the house must also be the only home of the person who died which in the example we are discussing is not the case, so the relief would not apply.

And finally, we have spoken a lot about the small gift exemption but bear in mind it applies only to gifts made during a person’s life, not to anything they leave their child to inherit in a will or otherwise.