Tax Savvy Ways to Save for Children
Helping clients save for their children or grandchildren is not just about choosing the right investment vehicle—it’s also about making the most of available tax reliefs.
Financial brokers can use several effective strategies to help families pass on wealth tax-efficiently. Here, we will explore three strategies: the Small Gift Exemption, Maximising Capital Acquisitions Tax (CAT) thresholds for Lump Sum Investments, and Section 73 policies.
1. Small Gift Exemption
The Small Gift Exemption allows any individual to gift up to €3,000 per year to another person without triggering a CAT liability for the recipient. This exemption is per disponer, per recipient, meaning multiple people can gift €3,000 each to the same beneficiary annually.
Example:
John and Mary, grandparents to Emma (aged 8), each gift her €3,000 annually. Emma’s parents, Sarah and Tom, do the same. That’s a total of €12,000 per year gifted to Emma tax-free. Over 10 years, if these gifts were invested in a unit-linked savings plan for Emma’s benefit, this could build up a fund of €140,035 for her 18th birthday (invested at an assumed growth rate of 6% per annum).
This strategy is simple, repeatable, and doesn’t affect the child’s lifetime CAT threshold.
By using Aviva’s Children’s Savings Investment Trust (Savings Plan with a Bare Trust), Emma’s grandparents and parents can set up policies for her benefit that utilise the Small Gift Exemption and provides trustee oversight regarding investment decisions.
2. Maximising CAT Thresholds for Lump Sum Investments
Children benefit from the Group A CAT threshold, which currently stands at €400,000. This means a child can receive up to €400,000 in gifts (or inheritances) from their parents over their lifetime without paying CAT. A child can receive up to €40,000 in gifts (or inheritances) from all other Group B family members over their lifetime without paying CAT.1
Financial brokers can use this threshold to help clients structure lump sum investments, such as single premium life assurance savings plans, on behalf of children.
Example:
Anne and David want to gift €400,000 to their son, Luke (aged 8), and invest this lump sum in a single premium investment bond on his behalf. This amount falls within the lifetime CAT exemption limit for gifts from parents to children. If Luke has not received prior gifts from his parents, the full amount is receivable tax-free.
Over the next 10 years, the investment grows to €600,000. The first €400,000 is tax-free under the CAT thresholds. The remaining €200,000, representing the investment growth, is subject only to exit tax, not CAT.
This approach allows for long-term CAT-free growth and efficient wealth transfer.
By using Aviva’s Children’s Investment Trust (Investment Bond with a Bare Trust), Luke’s parents can make significant gifts today for his benefit that can grow over time in a tax-efficient manner.
3. Using a Section 73 Policy to Pay a Gift Tax Liability
A Section 73 policy is a life assurance savings plan designed to pay gift tax liabilities. If structured correctly, the policy proceeds can be used to pay a CAT liability.
To qualify, the policy must:
- Be approved by the Revenue Commissioners,
- Be set up in such a way that the life assured and policyholder are the same person,
- Be endorsed under Section 73 from the outset,
- Be in place and have premiums paid into it for at least 8 years by the policyholder,
- Be set up so that the premiums in any continuous 12-month period cannot be less than 50% of the premium in any other continuous 12-month period, or less than 50% of the premium in the first 12-month period,
- Be used to pay gift tax on a lifetime gift made within one year of the policy being encashed.
Example:
Michael wants to gift his daughter Aoife a property to be used as her family home. The estimated value of the property in 8 years is €600,000. This exceeds the Group A threshold of €400,000, so Aoife would face a CAT bill on the excess €200,000:
- Taxable amount: €200,000
- CAT @ 33%: €66,000
Michael takes out a Section 73 savings policy and contributes to it annually for 8 years. The policy grows to €66,000 during this 8 year period. When the property is gifted, the policy is used to pay Aoife’s CAT bill. Because it qualifies under Section 73, the €66,000 is not treated as a further gift, and Aoife’s tax liability is fully covered.
This strategy is particularly useful for larger gifts. It ensures that the recipient receives the full intended benefit without triggering a tax bill.
Aviva’s Savings Plan is approved by the Revenue Commissioners for the purposes of Section 73. It can be used to help pass assets to children in a tax-efficient manner.
Summary
Each strategy offers a unique way to help clients build a financial legacy for beneficiaries such as their children or grandchildren. Whether through annual gifting, strategic lump sum investments, or tax-efficient planning with Section 73 policies, financial advisers play a key role in guiding families through the complexities of wealth transfer.
By combining these approaches, brokers can help clients maximise tax reliefs, minimise liabilities, and secure a brighter financial future for the next generation.
Warnings
| The information provided is accurate as of May 2025. You should not base your decision to invest in this product solely on the information in this article. Your clients should seek professional tax and legal advice to satisfy themselves of their tax position and the legal responsibilities of trustees. The information given is a guideline only. Aviva Life & Pensions Ireland DAC accepts no responsibility for monitoring CAT thresholds or for any CAT liabilities that may arise. |
| Remember that tax laws can change over time, so it is important to check revenue.ie for the latest information. . |
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