Home economics... answering your property questions
Our property expert advises on the tax implications of a tax free loan and how rental profits are split between property owners.
Question: I inherited some money and as I don't need it just yet, am planning to loan it to my cousin who is building a house and has been very good to me in the past. We have agreed a three-year repayment structure and have a legal contract. My query is this: I am not charging him interest and wonder if there is a tax implication?
Sinead replies: Yes there is, but it may not affect you or your cousin. When you gift someone money Revenue allows a tax-free element after which Capital Acquisitions Tax (CAT) is applied. However, this is a loan, so the 'gift' element is simply the interest foregone.
The method of calculation is generally taken as the best bank deposit rate the disponer (you) could have expected to get on the money.
Revenue tells me they are using a rate of around 2pc per annum at present (as an aside, I think this is on the high side and would be of the view that it could reasonably be challenged!). So, on a loan of say, €100,000, that would be €2,000, however, there is another allowance called the Small Gifts Exemption which is the annual amount you can 'gift' to anyone tax free. It is currently €3,000 and would leave you with a nil return for CAT purposes on a sum like this.
You haven't said how much the loan is, but you can base your calculations on this and I'm very pleased you have a legal contract and are doing things properly - families fall out over many things, and you don't want your kind offer to be one of them.
Question: My husband and I have an investment property which is rented out. We are making tax returns and wonder if we can 'split' the gain unevenly. I earn less than my husband, and can afford to 'earn' more rental income before I tip into the higher tax bracket. Can we show that my share of the rent is say, 70pc while his is 30pc or is there a better way to do this? We only have a small mortgage on it and therefore, cannot offset too much.
Sinead replies: Rental profits arising from an investment property are allocated to each spouse in proportion to their share of ownership. If the property is owned 50/50, then the rental profit should be split equally. It is not possible to 'elect' one spouse to be taxed on a disproportionate amount, any more than you could elect to be taxed on a portion of their employment income, says Barry Flanagan, Tax Manager with Taxback.com.
"An option is to transfer ownership of the property by electing to transfer a further portion of the property to yourself. As transfers between spouses receive favourable tax treatment, there are no immediate tax implications.
"It is perfectly legal to transfer 20pc of one share to the other spouse, which would mean the rental income would be taxable 70/30.
"Alternatively, the property could be transferred solely to one spouse. Legal costs are associated with formal transfers of ownership and as the property is mortgaged, the lender will be required to provide written consent. However, not all couples will be comfortable with the implications of asset transfers should the marriage break down."
Flanagan adds that you should also be claiming full offsets of 75pc of the mortgage interest, albeit small in your case, for maintenance fees, repairs, insurance etc. You can also claim a wear and tear deduction and 12.5pc for eight years against new furnishings.
The Ryan review
A report issued by the Society of Chartered Surveyors Ireland (SCSI) shows that building costs have increased by 4pc.
This reflects the upturn in the economy. However, it does have an implication on insurance and premiums can be expected to rise as a result - again. Insurers will be costing in increases as a result.
Given the complex renewal documents sent out to bewildered policyholders, who stuff them in a drawer until the last minute before automatically renewing their cover, many insurers rely on apathy and confusion as a means of retaining business. Foiling them by shopping around occurs too little, but it can result in much better deals.
House insurance is one area where you are almost certainly over-paying. The SCSI values rebuild costs at €115-€174 per sq ft, depending on where you live; Dublin being the most expensive, the north west the least. What's crucial is that this is not the value of the house - the sum most people automatically use when calculating their sum insured. Even a full rebuild after say, a fire, doesn't have to include land costs, or underground works. A rebuild is cheaper than a buy so it's all you should insure for.
Just doing that will bring down your premium. Going through your contents for actual replacement value as opposed to using a lazy percentage of the building's cover will cut your costs considerably.
Don't hang about - your premium will be going up, so now is the time to offset it.