Making Cents: Cracking questions for the New Year
Question
My daughter is getting married this year and we’d like to help with some of the costs. If I give her a sum of money that’s used towards the wedding, is that considered a gift for inheritance tax purposes and will she or I be liable for tax?
Answer
First off neither of you will incur any tax liability. At the moment your daughter can receive up to €335,000 from you tax free over her lifetime, with any excess of that amount charged at a rate, which is currently 33%.
Specifically in relation to the cost of a family event such as a wedding where some or all of it is paid directly by a parent, Revenue take the view that it’s a cost incurred by the parent rather than a gift of money they are giving to their child, therefore there are no gift tax implications and the amount paid by you doesn’t reduce the €335,000 your daughter is entitled to inherit from you.
And interestingly any other costs paid by the parent that are directly associated with the wedding i.e. wedding dress, flowers, band, photographer etc. are also not deemed to be a gift but rather a cost incurred, if paid by the parent.
Liam, I’m 51 and I’d like to know what extra monthly contributions I’d need to make to be able to retire at 60, but I’d like to get close to the figures I’d get if I worked until 65 which I think is a fund of about €177,000 and a tax free lump sum of €44,000. I contribute 6% of my salary which is €155 per month and my employer contributes 11% which is €295?
If you continue with your exiting contributions and using an annual return of 4% for the next 9 years, at age 60 your fund value would be worth c. €115,200 which would give you a tax free lump sum of €28,800.
So, there is a shortfall of €61,800 of what you’d like that fund to be.
And in order to bridge that shortfall you’d need to increase your personal contributions by 15% which would take you from contributions of €155 per month to €574 which is a monthly increase of €419.
If you can afford to do this, then you should reach the numbers you want to reach at age 60.
I have a tracker mortgage, when can I apply for the tax relief on this and are there any restrictions?
The new tax relief applies to (a) people who have a variable and or tracker mortgage and (b) people who have a mortgage balance o/s on the 31st of December 2022 of between €80,000 and €500,000.
Once you fall into these two categories you qualify.
And the amount been given is the increased interest you pay on your mortgage in 2023 when compared with the amount you paid in 2022. The tax relief on the increase will be 20%, which is the standard income tax rate, and it will be capped at €1,250.
So, if the difference amounts to say €2,800, the tax relief you’ll get is €2,800 x 20% = €560.
And to apply for this relief, you’ll have to apply directly to Revenue, and you’ll need to give them your bank statements for 2022 and 2023 so you won’t be able to apply until Jan’ 24 because you won’t receive your ’23 statement until then.
Liam, I have money to invest and I don’t know whether I should invest the full amount or drip feed a monthly amount into an account. I’m just worried about whether it’s invested at the right time or not and someone said investing each month safeguards you against going in at the wrong time?
A client of mine asked me the same question a couple of years ago. He had €10,000 to invest and the choice was (a) lodge the €10,000 straight away or (b) set up a standing order and over a two year period deduct €417 from the €10,000 each month and lodge it each month into a savings account.
My advice was to choose option (a) and invest the €10,000 straight away and it was a good decision because after two years the account balance now stands at €12,283 which was an increase of 22.83%.
Had he made monthly contributions, his balance would have been €11,530.08.
You might think that if the returns are exactly the same, then the outcome whether it’s a lump sum or a monthly contribution should also be the same. But they’re not because if let’s say you invested €10,000 for one year and the return was 10%, that would give you a return of €1,000 after a year. If you invested €833 per month which is still an investment of €10,000 over one year, at the same rate of 10%, your return for the year would be just €467.
Over the term long term, investing a lump sum has proven to be the method that generates the biggest return and whilst you are exposed to downward movements in the stock market in the short term, if you have the ability to stay invested over a longer period of time, say a minimum of 5 years, where you have the time to ride out the highs and lows, you’ll probably work out better with an initial lump sum lodgement.
Having said that, what that person told you about investing each month also has merit and it’s known in our industry as euro cost averaging.
And it’s where you save a fixed regular amount each month, and by doing this you are buying units in a fund at a different price each month, rather than buying at one price as is the case if you were investing a lump sum.
So, when the market reduces your regular saving will buy more shares, and when the market rises you’ll buy fewer, but the shares you bought in the previous months will be worth more.
And over shorter periods of time when markets are particularly volatile, is when regular savings and the euro cost averaging concept has proven to be the most effective way of investing.
There are pros and cons to each way of investing and other factors will also influence your decision like your attitude to risk, your particular circumstances, your time horizon, your end goal and so on.
But over the term long term, investing a lump sum gives you a greater chance of higher returns because it’s immediately exposed to the market, but maybe a good play would be to hedge your bets and invest 50% of your money by way of a lump sum lodgement and invest the remaining 50% by way of monthly regular contributions.
I owe c. €219,000 on my family home which is valued at c. €325,000. I have 21 years remaining and I was thinking of taking a lump sum off it, in order to get a lower rate. I’m not sure if this is the right thing to do or not because I’ve no idea what the financial gain would be or how much of a lump sum I need to make. Any help would be much appreciated?
Your current loan to value (LTV) is 67% and if you wanted to get a lower rate, you’d need the LTV at 60%.
Which means you’d need to make a minimum lump sum lodgement of €24,000 against your mortgage.
The impact of doing this would be twofold (a) you’d achieve interest savings of about €5,700.36 because you owe less and (b) you’d have lower monthly repayments of c. €28.28 which is the difference of having an LTV of <60%. By going into this lower band you’re reducing the rate charged by c. 0.30%.
These two savings over the lifetime of the loan amount to €12,826.92, which means the return on your €24,000 investment is a very good one at 53.44% or 2.54% per annum. This return might be a net breakeven depending on what the rate of inflation will be over the next 21 years, but regardless this is something I personally would pursue and recommend doing.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie