Tuesday 17 October 2017

Will son and his girlfriend face a tax bill if we let them live rent-free in our second home?

Should the free accommodation be deemed to be a gift, both you and your spouse can each give an annual tax-free gift to the value of €3,000 to your son - and also to his girlfriend (Stock photo)
Should the free accommodation be deemed to be a gift, both you and your spouse can each give an annual tax-free gift to the value of €3,000 to your son - and also to his girlfriend (Stock photo)

Oonagh Casey Grehan

We have a three-bedroomed semi-detached property which we have rented out for the past 18 years. The lease to the most recent tenants has now expired and we have decided to allow our son and his girlfriend move into the house.

We are not signing over the property to our son. However, we are allowing him to live in the property rent-free. Are there any tax implications for our son as a result of us doing this? Would he be liable for benefit-in-kind? We were getting €700 monthly rent for the house.

Phyllis, Kilmainham, Dublin 8

I am assuming that this property is owned jointly by you and your spouse. If you provide rent-free accommodation to a child who is either under 18 - or under 25 and in Third-level education, the free accommodation is exempt from gift/ inheritance tax. Otherwise, the provision of free accommodation that is not in the family home is deemed to be a gift.

Should the free accommodation be deemed to be a gift, both you and your spouse can each give an annual tax-free gift to the value of €3,000 to your son - and also to his girlfriend. (There does not have to be a family relationship to claim this tax-free exemption). So in total, your son and his girlfriend could get tax-free gifts worth up to €12,000 a year from you and your spouse. The annual value of the rent is €8,400 (€700 by 12 months). As this is less than the annual tax-free exemption that can be claimed by your son and his girlfriend, the gift would be tax-free.

Even if the market value of the rent exceeded the annual gift threshold, the fact that you are providing a "gift" of free accommodation does not automatically trigger a tax bill if you give the gift to your son, as there is a lifetime tax-free threshold of €310,000 between parents and a child. Any excess of the rent over the annual gift exemption would be covered by using up some of the lifetime threshold. Based on the current market value, as the rent does not exceed the annual gift exemption, the lifetime tax-free threshold between you and your son is untouched.

Benefit-in-kind only applies if an employer provides a benefit to an employee. It wouldn't be relevant in a family situation - unless there is also an employment arrangement in place.

I bought the family home 12 years ago. I lived there for a while but now don't. However, my 83-year-old father does. When he passes away, I want to sell up. Will I face any tax issues when I sell?

James, Bray, Co Wicklow

Ordinarily when you sell a property that is not your principal private residence, the disposal of this property is potentially subject to Capital Gains Tax (CGT) - if the property has increased in value since acquisition.

However in the case where a home is provided to a relative, there is an exemption from CGT that can be claimed if certain conditions are met. This relief is the Principal Private Residence (PPR) relief and it applies where a property is provided rent-free to a "dependant relative".

A dependant relative for this purpose is either a widowed parent, or a relative of either yourself or your spouse, who is incapacitated by old age or infirmity from maintaining himself or herself. The requirement that the relative be incapacitated by old age or infirmity only applies to a relative who is not either a widowed mother or father. The legislation governing this issue does not include a requirement that you provide for the upkeep of this relative - only that the property is provided rent-free to the dependent relative as a home.

You don't mention if your father is widowed or not. However, if he isn't, as he is 83 and you provide the house to him rent-free, he would also qualify as a dependent relative, and therefore allow the PPR exemption to apply.

Are there cases where an individual with a private pension wouldn't be entitled to a tax-free lump sum at retirement? Would a tax-free redundancy payment five years earlier rule one out from receiving a tax-free lump sum from their pension?

John, Raheny, Dublin 5

Generally, if you have a personal pension plan or a Personal Retirement Savings Account (PRSA), you are entitled to a tax-free lump sum on retirement. If you have more than one pension plan, the maximum amount you can take by way of tax-free lump sums from all of your pension plans is €200,000 - and this is a lifetime limit.

The only instance whereby you would not be able to take a tax-free lump sum from your pension plan is if you had previously waived your right to do so. This option to waive your right to take a pension lump sum is normally available when you take a redundancy ex-gratia payment when leaving an employment. By exercising this option, this increases the amount you can take tax-free at redundancy, rather than at retirement. So if you transfer your occupational pension contributions to a personal retirement bond or buy-out bond, the fact that you have waived the right to a tax-free lump sum on retirement for that fund follows into the bond. To answer your second question, taking a tax-free redundancy payment will not automatically rule you out from taking a tax-free lump sum from your pension fund. It only applies if, at the time of redundancy, you opt to waive your right to take the tax-free lump sum at retirement. It may be that the tax exemption available to you is sufficient to cover the ex-gratia payment your employer is offering you - or the amount that isn't tax-free is minimal.

If you decided to waive the right to take a lump sum on retirement, it only applies to that particular pension fund.

I have a family home in Dublin and I also have a holiday home in West Cork, which I hope to gift to my children in my will. The West Cork house is used only for family holidays. What would be the tax implications of gifting the summer home to my children? Also, if we were to let out the summer house, what would be the tax implications of doing so?

John, Baldoyle, Dublin

If gifting the summer house under your will, the value of the property will be included in your estate and each child's share will only be taxable if their total inheritance (including any previous gifts or inheritances taken from you or their mother) exceeds the inheritance tax-free threshold which applies between a child and their parents. That threshold is €310,000. There will be no implications for you or your estate as there is no Capital Gains Tax (CGT) on death.

If you gift this property to them now, the same rules apply in that it will only be taxable if the tax-free threshold of €310,000 is exceeded. If, however, the property had appreciated in value since you bought it originally, there could be a CGT bill for you as you are disposing/transferring ownership of a property that is not your principal private residence - regardless of whether it has been let or not, and regardless of the fact that you are not selling it but only gifting it.

If you let the summer house out, any rental income arising will be taxable in the hands of the owners (be it you or your children), and the normal tax rental income tax rules will apply.

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.

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