With a view to saving on inheritance tax at a later date, parents often choose to gift part of their assets to their children whilst they are still alive. But what if you do not hold these assets in cash – for example, because they are tied up in property or shares? Or what if you wish to retain control over your assets yourself? In that case, a so-called ‘paper gift’ may be a good option. The advantage of a paper gift is that it does not actually have to be paid out. If the paper gift is structured correctly, it will be deductible for inheritance tax purposes at a later date. The paper gift is therefore often used to save on inheritance tax in the future.
Savings
The tax rates for inheritance tax and gift tax are the same. A rate of 10% applies to the first €128,750 (in 2021), and a rate of 20% applies to the amount above that. By making a gift now at a rate of 10%, you can avoid this amount being subject to 20% in inheritance tax at a later date. Depending on your circumstances, the saving could therefore amount to tens of thousands of euros in inheritance tax.
Not actually paying
A gift in writing is a form of gift-giving whereby the donor is not required to pay out the amount of the gift. The amount can only be claimed upon the donor’s death.
Notarial deed
The gift by deed must be recorded in a notarial deed. This prevents the gift from lapsing upon the donor’s death and thus ensures that it constitutes a deduction for inheritance tax purposes.
6% interest rate
The donor must pay 6% interest annually to the children who have received a gift by deed. It is important that the children are later able to prove that 6% interest on the claim was indeed received each year. If this interest has not been paid, or if payment cannot be proven, the paper gift will still be counted as part of the inheritance. Paying 6% interest naturally also ensures that even more assets pass to the children.
Implications for income tax
For the donor, a notarial gift constitutes a liability in Box 3 for income tax purposes. For the children, the notarial gift is treated as a receivable in Box 3. As a result, a notarial gift may also have implications for certain benefits.
Pay gift tax immediately
If your children receive a gift in writing, they will have to pay gift tax on it if the amount exceeds the tax-free allowance (€6,604 in 2021). It is also possible for the donor to pay the gift tax. However, please note that paying the gift tax is then also regarded as a gift.
We’d be happy to discuss with you which method of giving best suits your assets and personal circumstances.