Tuesday 19 September 2017

Will our son face a tax bill if we gift him side garden of our now rented-out family home?

'If we assume that the land size does not exceed the planned house size plus one acre, then you should qualify for the CGT exemption.'
'If we assume that the land size does not exceed the planned house size plus one acre, then you should qualify for the CGT exemption.'

Oonagh Casey Grehan

We built and lived in our family home for 25 years and have now let this home to a tenant for the last five years. My husband and I intend to give our son a gift of a site from the side garden - for the purpose of him building a new home for himself and his family.

The house will remain occupied by the tenant. The site would be valued at €100,000. Will my son be liable for Capital Acquisitions Tax (CAT) on this €100,000 gift? Also, would we face a Capital Gains Tax (CGT) bill because of this transfer? If so, would the CGT bill be based on the value of the side garden or the value of the entire property including the house?

Breda, Naas, Co Kildare

As always, when there is a gift of this nature, we need to consider both sides of the equation: you as parents disposing of an asset - and your son as the recipient of a gift. As it is land you are transferring to your son, this is a chargeable disposal but there is an exemption from CGT for such a disposal, provided you meet the associated conditions. First, the transfer must be for the purposes of your son building a house on the land which will be his main residence. Second, the market value of the land must not exceed €500,000. Third, the site size cannot exceed the house size plus one acre.

If we assume that the land size does not exceed the planned house size plus one acre, then you should qualify for the CGT exemption.

For your son, the recipient of your generosity, whether he is liable to CAT will depend on whether you or your husband have previously given any gifts to him. If you have not given him any previous gifts, and you give him this land valued at €100,000, €6,000 is deemed to fall under the annual gift exemption, and is ignored for tax purposes. The balance of €94,000 is below the €310,000 tax-free threshold for gifts between parents and children, so is tax-free. It will, however, be taken into account for future gifts or inheritances received by him from either or both of you.

Your son will be liable to pay stamp duty on the transfer of the land. His solicitor, who will manage the conveyance of the land, should be able to advise him on his obligations in this regard. There previously was an exemption from stamp duty for a transfer of this nature but this was abolished in 2010.

I would also suggest that as you have a tenant in situ in the house, you should consult with your solicitor regarding their rights and your responsibilities as a landlord - taking into account this transfer.

My brother and I live in the old family home. We have lived here all our lives and are both single. The house was willed to me by my father 30 years ago. I am now in my seventies. When I die, I would hope that my brother could continue to live on in the family house for the rest of his life.

The family house is valued at about €250,000. Budget 2017 allows a sibling to inherit €32,500 tax-free. If I was to will the family house to my brother, would he have to pay tax on the balance of €217,500 - or could he avail of the dwelling house relief exemption?

I also own an apartment valued at about €200,000. I have three other siblings, each of whom has their own houses. We all use the apartment from time to time. It is not let out and no rent is charged. Ideally I would like to share the total value of my estate, including the two properties, equally among my four siblings - and yet allow my brother to live on in the family home, rent-free, for the rest of his life. How can I do this?

Eilish, Cabra, Dublin

It would appear, Eilish, that you have two options in order to allow your brother remain living in the family home after you die

First, you could will the house to him absolutely, and he will own it after your death. If he does not own another property at the time of your death, and he is still living there, he should qualify for the dwelling house exemption. This is a very tax-efficient passing of assets, but the issue you need to consider is that you are giving him over half of your estate, and therefore there will not be an equal distribution of your estate between your siblings.

The alternative option is to give your brother "right of residence" in your family home for the rest of his life. This means that he does not own the whole property outright but is entitled to live there for his lifetime and, on his death, the property is then passed on absolutely to whomever you nominate in your will. The benefit of this option is that he gets to remain in the house, and the value of this right of residence for inheritance tax purposes is significantly less than the value of the house.

The valuation (for inheritance tax purposes) is based on the proportion of the market value of the property that the annual value of the benefit for your brother bears to the total annual rental value of the property. This is an actuarial calculation but in practice Revenue applies the rule of thumb that a right of residence equates to 10pc of the value of the property. This would reduce the inheritance value for your brother, based on the current value, to €25,000. In turn, this amount is then further reduced as right of residence is a limited interest - depending on the age of your brother at that time he receives the right.

You should note that the balance of the value of the house will be deemed to be received by the ultimate beneficiary or beneficiaries, and they will be taxed on this as part of their inheritance, at the time of your death - and on the balance, at the time of your brother's death.

This can be a complicated and complex area and I would suggest you seek professional advice on this matter, before you re-do your will.

I would like to help my daughter buy a house by giving her a substantial cash contribution towards the purchase. She would be taking out a mortgage to meet the balance of the cost of purchase. Would she be liable for tax on this gift now - or would it be subject to inheritance tax when my wife and I die?

Brian, Rathfarnham, Dublin

Firstly, you can both give her up to €3,000 per annum tax-free (€6,000 in total) and this is not counted as part of the tax-free threshold for gifts between parents and children (which is currently €310,000). Whether the gift is taxable now or later will depend on whether you or your wife have previously given any gifts to your daughter.

Say, for example, you have not given her any previous gifts, and you and your wife want to give her €50,000 now to help with the mortgage. Of this €50,000, €6,000 is deemed to fall under the annual gift exemption, and is ignored for tax purposes. The balance of €44,000 is well below the tax-free threshold of €310,000, so is tax free.

The €50,000 gift will, however, be taken into account for future gifts or inheritances. If she subsequently inherits from you assets valued at, say, €500,000, this gift of €44,000 will be aggregated with the €500,000. That would bring the total value of the gifts and inheritances received by your daughter to €544,000. The excess over the tax-free threshold, using the current threshold of €310,000, will be €234,000, which will be taxable, at the time of inheritance.

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 partner Fagan & Partners

Sunday Indo Business

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