Gifts - a tool for inheritance planning
A gift is something given voluntarily directly or indirectly without payment in return. A gift can be measured in money or money’s worth and is usually given to show favor toward someone or to honor an occasion.
As far as the concept of gifts goes, there is no distinction made between immovable or movable property. The same rules apply whether the gift consists of shares in the family company, real estate, a trip abroad, a right of possession, a car or a pet animal.
Everyone have their own reasons for giving. A normal set up is a senior family member, who wants to help the younger generation financially by for example selling an apartment below market price or giving away shares in the family company in order to make way for a smooth change of generation in due course.
Sometimes there is an inheritance plan in place, and sometimes a gift is just a random occurrence.
Regardless the amount of planning behind the gifts, it is a good idea to be aware of the legal consequences a gift might have – especially tax wise.
How much tax is payable?
How much tax you must pay depends on:
1) the asset's market value
2) the date when you received the gift
3) the family relationship with the donor
4) the type of the asset being given, and
5) whether or not you have received gifts from the same donor earlier.
Let’s start with the market value. The market value equals the price a willing buyer is ready to pay for the particular property. This means that the market value does not include sentimental value. The sentimental value is a big issue in family law transactions. The family members usually have a connection to for example the summerhouse, where they have spent all their childhood summers, and believe it to be far more valuable than it is on the open market.
The receiver of a gift becomes eligible to pay gift tax on the day of the receipt. Regardless what happens to the value of the gift 2-3 months after the receipt you still pay gift tax based on the day you received it. This can come as a shock with for example shares that suddenly drops.
How closely related or connected the giver and receiver are, plays a big role in deciding the amount of tax. There are two tax brackets, each with different amounts. Close relatives and family are in the first bracket and pay 8-17 % in gift tax. Second bracket consist of distant family and nonrelatives. They pay gift tax 19-33 %.
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. For example a gift intended to cover educational expenses, expenses connected to a child's upbringing, or living expenses is not considered a taxable gift. But there are also risks connected to gifts of this sort, and it is wise to consult at lawyer before paying for an expensive education abroad for your child – in order to avoid any unpleasant surprises.
In Finland we have something called the “three year” rule. This means that it is possible to receive assets to an accumulated value of 4.999,99 € (as of January 2017) during a period of three years from the same donor without paying gift tax. If you have received gifts from the same donor to an aggregated value of for example 5.100 € during the past three year, you must pay gift tax on the whole value. Therefore many people, that have an inheritance plan in place, pays an amount of 4.999,99 € to a trust in their grandchildren's name once every three years. Notable is that the rule is per giver and receiver. Therefore both the grandmother and grandfather for example, can give 4.999,99 € each/grandchild/3 years.
However as of January 2017 this three year rule does not apply to transfers of usual household goods and furniture valued at max. 5,000 €. In case the value exceeds 4,000 €, it is included in calculations of the aggregate value of gifts received from the same donor in the course of three years. If the value stays below €4,000, you may receive household goods as gifts more than once in the course of three years.
This means that the three-year rule is not applied on such goods i.e. there is no adding up of the values of the gifts received within that period. This means that for example and aunt or uncle can help decorate their nephew’s or niece’s first apartment without having to worry about gift tax too much.
If a valuable gift is given to a natural heir (a child, grandchild etc.), the tax authorities normally treat it as an advance inheritance (often referred to as advancement) unless the donor has expressly stated in the text of a gift deed or otherwise that it should not be regarded as an advance inheritance.