Saturday 1 October 2016

Your Questions: Can I get rent-a-room tax relief after hosting foreign students in my home over summer?

Michael Gaffney

Published 14/08/2016 | 02:30

Will I have to pay any Capital Acquisitions Tax (CAT) should the house be gifted to me? (Stock image)
Will I have to pay any Capital Acquisitions Tax (CAT) should the house be gifted to me? (Stock image)

Over the summer, I hosted some foreign students in my home who were attending education classes. We hosted two teenage students for two weeks, and then another two students for the next two weeks and so on - for a couple of months.

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My question is can I now qualify for the rent-a-room tax relief on the income earned?

Gemma, Ranelagh, Dublin 6

The rules of the rent-a-room scheme require the guests to be residential.

A: You would think that any occupation of the room in a normal house must be residential - as opposed to business use or other ways of occupying property. However, the Revenue Commissioners have made a subtle distinction between what it regards to be a resident and what it regards to be a guest.

It therefore seeks to deny the benefit of the rent-a-room scheme to short-term guests staying in your home, such as in the case of Airbnb occupants. The point is debatable because the word 'residential' is not defined in tax law. If you look up various dictionary definitions, there are examples which support both sides of this debate.

However, the students you mention seem to fit the definition of the old-fashioned lodger. I think the rent-a-room relief was intended for lodgers and therefore should apply to the rents you got from the students. However, because of the lack of a clear definition of 'residential' in tax law, it is not clear if income earned from lodgers qualifies for tax relief under the rent-a-room scheme.

So to be on the safe side, tick the 'expression of doubt' box on your tax return.

Q: My husband and I moved in with my older brother to take care of him in April 2013.

In October 2013, my brother moved into a nursing home and asked that we continue to live in his house permanently.

We took over the running of the house (bills, upkeep and so on) from then on and sold our own home the following April.

The house has remained in my brother's name and we have no other property.

Now my brother wants to gift the house to me. We have been living permanently here since April 2013. Will I have to pay any Capital Acquisitions Tax (CAT) should the house be gifted to me?

I am also the sole beneficiary of his will - which includes leaving me the house.

Chris, Dún Laoghaire, Co Dublin

A: Generally, CAT applies to gifts. However, there is a particular exemption which might apply here.

The exemption applies where a house is gifted. There are a number of conditions which you have to meet. Firstly, at the date of the gift, you can't own any other residential property. This would include any interest or share in any house or apartment - even if rented out.

You must have lived in the house for three years, and the donor (in this case, your brother) must not have lived in the house for three years. It appears this condition will be met in two months' time. The house must also be a normal dwelling house and this can include up to one acre of garden.

You must keep ownership of the house and use it as your main residence for six years after the gift. However, there is a provision that if you sell it and reinvest all the proceeds in a new house (which becomes your new residence), then this six-year condition is not broken.

Q: My husband passed away a few years ago. I owned an investment property jointly with him which was bought for about €300,000 in 2006.

When my husband died, the balance of €200,000, which was still outstanding on the mortgage, was cleared - due to the life policy held.

Should I sell the property now, what taxes will arise (if any)? The property is only worth about €200,000 today.

Imelda, Greystones, Co Wicklow

A: I assume the investment property was owned 50:50 with your husband. If you sell the property now, there could be capital gain on the half share that you inherited from your husband - but only if the property has gone up in value since the date your husband died.

For tax purposes, you are regarded as having acquired your husband's share of the property on the date he died -for whatever its value was at that time. There may have been a valuation done for probate purposes. If not, ask a valuer to do one for you.

It looks unlikely that much, if any, tax will arise. This is because the other part of the property - the share you owned since 2006 - has gone down in value so you should have a capital loss of €50,000. (This is the drop in value of your original half share from €150,000 to €100,000.)

This loss reduces any taxable gain on the half that you have inherited from your husband, so tax could arise only if the inherited half-share has gone up in value by more than €50,000 since the date your husband died. Any taxable gain would be taxed at the current rate of 33pc.

Any taxable capital gain can also be reduced by losses, if any, on other unrelated disposals of assets (to non-connected purchasers) in the same or earlier years. There is also a tax exemption for the first €1,270 of capital gains in any year.

You will see that the answer above is not influenced by the life assurance policy. This does not affect the tax situation here.

Q: I run a family business (a butcher shop) and have been recently diagnosed with a serious illness. I have two sons. Although they both work for the business, they don't wish to continue doing so.

After much thought, my wife and I have decided that it would be wisest for us to sell the business now. How can we do so in the most tax-efficient way?

Tom, Clonmel, Co Tipperary

There are two taxes in particular which you will now have to consider.

One is Capital Gains Tax (CGT) which currently stands at 33pc and which could apply on the sale of the business where it is worth more than you paid to acquire it.

The other tax is Capital Acquisitions Tax (CAT - also known as gift tax or inheritance tax). This is also charged at a rate of 33pc.

To give a precise answer, I would need a lot of extra detail but here are some general thoughts which hopefully will steer you in the right direction.

Firstly, on the sale of the business, there is an exemption from CGT (called Retirement Relief) which might apply if you are between 55 and 65 years of age (inclusive) and if the value of the business is less than €750,000.

If you are over 65, the same exemption applies but only where the value of the business is €500,000 or less. There are detailed conditions which you need to check out. The main ones are that you should have owned the business for at least 10 years.

Secondly, on gifting the proceeds to your wife and two sons, there are exemptions from CAT which will reduce or maybe eliminate that tax. Anything you gift to your wife is exempt from tax.

If your two sons have not received any material gifts from you or your wife in the past, they can get €280,000 each free of tax from you.

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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