Thursday 8 December 2016

Must we declare the property we gifted to our son in our tax return - and is tax due?

Barry Flanagan

Published 09/10/2016 | 02:30

'If a capital loss is incurred on the deemed disposal, this loss can only be utilised against gains realised in respect of disposals to the same connected person.'
'If a capital loss is incurred on the deemed disposal, this loss can only be utilised against gains realised in respect of disposals to the same connected person.'

We gifted an investment property worth €100,000 to our son last year. Do we need to declare this in our 2015 tax return - and could we face a tax bill as a result?

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Denis, Navan, Co Meath

The transfer of assets between connected persons may have tax implications for both parties. In this regard, if parents gift an asset to their child, this will be deemed as a disposal for Capital Gains Tax (CGT) purposes at the current market value of the asset. So the parents will be required to pay CGT at a rate of 33pc on any deemed gain realised - that is, the difference between the market value at the deemed disposal and the acquisition cost of the property. The first €1,270 of your annual gain is exempt from CGT (if the property was jointly owned, each spouse can avail of the annual exemption). If a capital loss is incurred on the deemed disposal, this loss can only be utilised against gains realised in respect of disposals to the same connected person.

The CGT pay date depends on when the deemed disposal was made. For disposals made between January 1 and November 30, CGT is due by December 15. For disposals made in December, CGT is due by January 30 in the following year. Based on the information provided (that the gift was made last year), you may be subject to interest on any late CGT payment.

Irrespective of whether a gain or loss was realised, you must report the deemed disposal on your annual tax return under the Capital Gain section in this return. Alternatively, if you are not required to file an income tax return, you should complete form CG1.

The recipient of the gift (your son) may be subject to Capital Acquisition Tax (CAT - also known as gift or inheritance tax) at a rate of 33pc on the gift received. The value of the gift subject to CAT charge will be the market value of the investment property at the date of the gift (that is, €100,000). Any CGT payable by you on the deemed disposal can be offset as a credit against any CAT payable by your son on the gift received. This is subject to the condition that your son will not dispose of the investment property within two years after the date of the gift.

The lifetime threshold that your son may avail of for any gifts or inheritance received either from you or your spouse is €280,000 in 2016. So all gifts must be aggregated and only the excess over €280,000 will be subject to CAT. This would mean that no CAT would be payable if no prior gifts were received by your son from either you or your spouse. In addition, under the small gift exemption, the first €3,000 of gifts from a parent to a child in any year is exempt from CAT. So, two parents can make gifts to a child to the value of €6,000 in any year free of CAT.

Last year, we sold a house which we had rented out to tenants for the previous four years. Prior to letting out the house, we had lived in it ourselves for 10 years and it was our principal private residence. We bought this house for €300,000 in 2001 and sold it for €320,000 in 2015. Must we pay tax on the €20,000 profit?

Orla, Templeogue, Dublin 6W

Capital Gains Tax (CGT) at 33pc is due, payable on the chargeable gain that arises from the sale of the house. In order to determine the chargeable gain, you are allowed to include additional acquisition costs in the original purchase price and reduce the sale proceeds received by incidental costs incurred when you sold it. For example, fees paid to agents, stamp duty and any legal or selling costs should be included. In addition, you may also reduce the gain by deducting any expenditure incurred to enhance the value of the house (for example, adding an extension to the house).

There is a full exemption from CGT on the disposal of properties used as dwelling houses - known as principle private residence relief (PPR). However, as you did not use the house solely as your principle residence during the whole period of ownership, you will only be entitled to partial PPR. In effect, you will be able to reduce the gain by the portion that relates to the period you have lived in the property over the whole period of ownership. You should note that there are strict rules to determine the period of occupation - that is, you can take in consideration the actual period you lived in the house and in addition, the last 12 months of ownership.

Therefore the gain should be apportioned to exempt the period of occupation and the last 12 months of ownership. Accordingly, 11/14ths of the gain should be excluded (that is, 10 years of occupation plus last year, divided by the total period of ownership).

Finally, after you determine the chargeable amount allowing the incidental cost and/or PPR relief, you are entitled to an annual GGT exemption of €1,270 to reduce the amount on which CGT at 33pc is due.

I am a teacher who does some occasional freelance journalism work. I earned €270 from freelance journalism in 2015 as I was only starting out as a freelancer then. Do I need to file a tax return for this €270 now - and will I have to pay tax on that money?

Sally, Baltimore, Co Cork

Tax on income that you earn from employment is deducted from your wages by your employer and is paid over to the Revenue Commissioners by your employer. This is known as PAYE (Pay-As-You-Earn) and the amount of tax that you have to pay depends on the amount of the income that you earn and on your personal circumstances. The Universal Social Charge (USC) and Employee PRSI are also taxes which are deducted from your wages by your employer.

If you earn income outside of your employment income, this income should be declared to the Revenue via an annual income tax return - if it has not been coded into your personal tax credit certificate. Income tax on small amounts (generally below €3,174 in 2015 and €5,000 from 2016) earned outside your employment, such as dividends or rent, can in certain cases be paid under the PAYE system.

Your total income from all sources should be shown on your Form 12A when you make your initial application for a tax credit certificate. Thereafter, your freelance income should be reported on a Form 12 which is an annual tax return that declares your employment and other sources of income.

To assess this additional income without requiring a tax return be filed, Revenue may agree to reduce your tax credits and rate band by an amount equal to your other income. This additional income would then effectively be taxed under PAYE by virtue of the reduction. No return would then be required. If no such agreement has been reached, you will be obliged to file a return.

If this additional income breaches the Revenue threshold (greater then €3,174 in 2015 or €5,000 from 2016) it may not be possible to tax it through the PAYE system and you must register for income tax as a self-assessed individual. You would then be obliged to report this income along with your employment income on an annual income tax return Form 11. Tax is payable on this earned income.

The pay and file deadline for both a Form 12 and Form 11 is October 31 each year following the year you earned this income (subject to usual filing extensions if paying and filing online via the Revenue Online Service).

Email your questions to lmcbride@independent.ie or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.

Tax manager at Taxback.com

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