Friday 18 August 2017

Your Questions: Do I face a tax bill for the property that I'm living in rent-free while in college?

Should you be uncomfortable with investment risk, an annuity is probably your best bet (Stock photo)
Should you be uncomfortable with investment risk, an annuity is probably your best bet (Stock photo)

Barry Flanagan

I am a 25-year-old medical student in my final year of college. I live away from home - but in a second property of my parents. I am living in this property rent-free.

I understand the tax rules around adult children living in second properties were tightened up recently. Does this mean that I have to declare the fact that I'm living in a second property to the Revenue Commissioners now - and could I be hit with a tax bill as a result?

Olga, Portabello, Dublin 8

While it is true that the rules around gifts from parents to children were tightened recently, there is a long-standing exemption from Capital Acquisitions Tax (CAT - the tax paid on inheritances or gifts) for money (or money's worth) given by a parent for the support, maintenance or education of their child. To qualify for the exemption, the support given must be considered normal and reasonable.

This exemption is separate and in addition to the normal CAT-exempt lifetime tax-free threshold of €310,000 in respect of gifts and inheritances taken by a child from their parents (which allows you to inherit up to €310,000 tax-free from your parents over your lifetime).

As an example of the support given by a parent to a child that is exempt under the new CAT rules, Revenue cites that the free use of a house by a child attending university is not subject to tax - as long as the child living rent-free in the parent's house is not more than 25 years of age and the support provided is normal and reasonable.

Accordingly, no declaration to the Revenue is required in your circumstances.

In addition, provision of a weekly or monthly sum of money to a child of not more than 25 years of age attending college (in order to cover costs such as transport to and from university, college fees, rent, food, clothing, purchase of educational material and pocket money) are also not subject to CAT.

Bear in mind that as you will be more than 25 years of age next year, the position will change for you then. So if you continue to live rent-free in the premises, an imputed gift of the annual rental value of the property will be deemed to be received. So you could face a tax bill as a result, depending on whether or not you have used up your tax-free CAT threshold of €310,000.

Should you face a tax bill, don't forget about the annual CAT small gift exemption, which allows you to receive up to €3,000 of gifts or inheritances a year CAT-free.

I would like to help out my son with his house purchase. I have a sum of money in the bank which is attracting zero interest. I am prepared to lend him €50,000 of this money over an agreed term to be repaid fully.

I appreciate that the Revenue Commissioners will see this as a gift in terms of interest foregone. But the question is - what interest? How is the 'gift' element of the interest computed?

And if I were to charge a small amount of interest that be paid to me by my son, would that prevent a tax bill from arising on the interest forgone?

Daithi, Portlaoise, Co Laois

It is correct to state that there is a gift element to the loan even though the loan provided is to be repaid - as usually interest is charged on every loan. A charge to Capital Acquisition Tax (CAT) arises on the "imputed" interest element of an interest-free loan, regardless of who grants it.

In the case of interest-free loans, the amount subject to CAT is the highest rate of return that could be obtained by investing the funds in a deposit account. Whether your son needs to pay CAT on the gift element depends on the interest rate that would be usually charged.

If, for example, the highest rate of return that could be obtained by investing the funds in a deposit account is 2pc, you son will receive an annual gift for the purpose of chargeable gifts in the amount of €1,000 (that is, €50,000 x 2pc). However, as any gift from one person to another of up to €3,000 per year is relieved by the annual CAT small gift exemption, no CAT will be due in this case, as the amount of interest foregone is below this threshold.

If you charge some interest on the loan, the amount of the interest received is also regarded as part of your income for the year and should be reported to the Revenue on your tax return under Schedule D Case IV.

If it is the case that the loan is never repaid by your son, the full amount of €50,000 will be regarded as gift. As your son can inherit up to €310,000 tax-free from his parents over his lifetime, the gift of €50,000 may not be subject to CAT, depending on whether you son has received any other gift or gifts from you (or his mother) previously.

I am planning my will and I wish to leave my house to my brother who has been resident in Britain for over 50 years. He is tax compliant and tax resident in Britain - but is planning to return home. If my brother were to return to live in Ireland, would he have to pay inheritance tax on the house which I leave to him?

The market value of the house is currently €200,000 and there is still a mortgage of €80,000 outstanding it. If there were still a mortgage outstanding on the property when I pass away, would my brother have to repay it?

Anne, Swords, Co Dublin

A Capital Acquisition Tax (CAT) bill will arise on the inheritance your brother is to receive. As the property you intend to leave to your brother is situated in Ireland, CAT will be chargeable irrespective of whether he is already back in Ireland or not at the time he receives the inheritance. The current CAT rate is 33pc.

The taxable amount is estimated by taking the market value of the house at the date of inheritance and allowing any liabilities, cost and expenses payable out of the taxable inheritance as deductions.

As a mortgage is secured on the house, your brother will be allowed to deduct any outstanding mortgage amounts due. In your case, if we assume that the figures you have outlined stay the same, the taxable amount would be €120,000.

You brother can inherit up to €32,500 tax-free from you over his life-time, depending on whether or not he has already received any other gifts or inheritances from you or other siblings, nieces or nephews. This tax-free allowance could allow him to reduce his CAT bill. The annual CAT small gift exemption also allows him to get gifts or inheritances up to €3,000 a year tax-free.

An exemption from CAT, known as dwelling house relief, might be available to your brother, where for at least three years prior to the inheritance, he occupies the house as his main residence. For this period however, he should not be beneficially entitled to any other dwelling house. In addition, if he is under the age of 55 years at the time of the inheritance, he will be required to reside in the house for at least six years thereafter in order for exemption to apply.

Should you proceed with your plan, contact your mortgage provider to confirm that responsibility for the mortgage repayments will also pass.

Barry Flanagan is tax manager at Taxback.com

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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