Monday 5 December 2016

Your questions: Does my father face tax bill after transferring land to me - even though it was a gift?

Christine Keily

Published 28/02/2016 | 02:30

'You are entitled to receive a certain amount of gifts and inheritances tax-free from your parents. However, to be exempt from CAT, the value of your total aggregate gifts or inheritance received from your father or mother in your lifetime must not exceed certain thresholds'
'You are entitled to receive a certain amount of gifts and inheritances tax-free from your parents. However, to be exempt from CAT, the value of your total aggregate gifts or inheritance received from your father or mother in your lifetime must not exceed certain thresholds'

Q. I have just built a house on land which was owned by my father. In order to get a mortgage to build the house, the site was transferred to me. It was valued for mortgage purposes at €80,000. The land is three acres in total.

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We are now told that my father has a tax liability on the transaction - even though he did not make any gain from the transfer. It was a gift to me. Is this possible?

John, Tarbert, Co Kerry

A. Your father transferred the site to you for no consideration. However, when it comes to a transfer between connected parties, for tax purposes, the transaction is treated as a disposal at a market value.

This means that for tax purposes, your father is treated as if he had received market price for the site he transferred to you. Your father is therefore chargeable to Capital Gains Tax (CGT) on the 'gain'. That gain is calculated based on the market value at the date of transfer - when compared to the price he paid for the land when he first bought it.

Tax legislation does provide for CGT relief in respect of the transfer of a site to a child in certain circumstances. Exemption is available where a parent transfers land to his child to enable that child to build a principal private residence for himself.

The site qualifying for this exemption must not exceed one acre - in addition to the house itself. The site must also not cost more than €500,000. However, as the site transferred in your case exceeds one acre, this relief will not apply.

It is important that you also consider your own potential tax implications arising due to the transfer of the site. As the transaction is a gift to you, you may have to pay Capital Acquisition Tax (CAT) on the transfer.

You are entitled to receive a certain amount of gifts and inheritances tax-free from your parents. However, to be exempt from CAT, the value of your total aggregate gifts or inheritance received from your father or mother in your lifetime must not exceed certain thresholds. Different thresholds apply throughout the years. Currently, the threshold is €280,000 and this threshold was applicable from October 14, 2015.

Therefore, you need to consider if you have received previous gifts or inheritance in order to determine if a CAT liability arises for you on the acquisition of the site. You will be able to offset the CGT payable by your father against the CAT due - if any.

Q. My sister bought a house in Dublin in 1994 for IR£55,000. She has never lived in the house; it has always been rented. She has lived in Spain for the last 10 years. She sold her house in Spain last year and is now renting in the country. All taxes in each country are paid and up to date. There is no mortgage on the house in Dublin and it is now worth about €380,000.

What is her most tax-efficient way to deal with the Dublin property? What tax liabilities would she face if she returned and lived in the property permanently - or if she decided to sell the property and buy a new one?

Nora, Kimmage, Dublin 12

A. Gains arising on the sale of certain assets, such as Irish land and buildings, are always subject to Irish capital gains tax (CGT) - regardless of the residence or domicile of the individual selling the assets. As your sister's house is located in the State, a charge to Irish CGT will arise on any sale of this property, despite the fact that your sister is living in Spain.

There is a valuable tax relief on CGT known as Principal Private Residence (PPR) relief. This exempts from CGT any profit arising from the sale of a person's principal private residence.

However, to get full exemption from CGT under this relief, the house must have been occupied (by the owner - in this case, your sister) for the full period of ownership.

A partial exemption applies if the house is occupied (by the owner) for only part of the period of ownership. The last 12 months of the period of ownership are always treated as a period of occupation for the purpose of the relief.

In addition to actual occupation, certain periods of absence may also be treated as deemed occupation when determining one's eligibility for PPR relief. For example, certain periods of absence for work purposes in Ireland and abroad will be treated as deemed occupation. However, as your sister did not live in the house before moving to Spain, PPR relief will not apply in this instance and CGT will be chargeable on any profits made from the sale of this property.

If your sister returned and lived in the property permanently before selling the house, any future profit on the sale of the house will be reduced by partial PPR relief. The longer she lives in the house, the greater the benefit of the relief.

Should your sister sell the Dublin property and buy another one in Ireland, the purchase of the new property will have no impact on the taxes arising on the disposal of the current property. Similarly, how the proceeds of such a sale are utilised will have no bearing on the taxation of the proceeds in this instance.

Q. We started to rent out our home last year and will be filing tax returns for the first time this year. The rental income does not cover the mortgage and therefore we are not making any sort of profit from renting the house out.

We have recently started to rent a property ourselves so we are paying this rent and supplementing our own mortgage.

My husband and I are both PAYE workers. Are there any tax considerations for people in this position who are renting their homes for practical, not profit, purposes and are actually out of pocket every month? It seems very unfair that we will have to pay a tax bill on the entire rental income earned on the mortgaged home, even though the rent isn't covering the mortgage.

Geraldine, Newbridge, Co Kildare

A. The same tax principles apply for all people who rent out their Irish properties, regardless of the purpose of their intentions.

As a landlord, you are taxable on the gross rental income from the property, after the deduction of qualifying expenses incurred by you during the year. Unfortunately, while the mortgage interest paid is recognised as a tax-allowable deduction, the capital portion of the mortgage is not tax-deductible. Furthermore, since April 7, 2009, the allowable deduction in respect of the mortgage interest incurred has been reduced from 100pc to 75pc. It is also important to know that in order to be able claim the mortgage interest as an allowable expense, you must have registered the tenancy with the Private Residential Tenancy Board (PRTB).

As a taxpayer, you are also entitled to additional tax deductions against your rental income for expenses such as costs for maintenance, repairs, management and so on. For this purpose, these expenses must have been incurred in the period the property was let out as pre-letting expenses are not recognised by the Revenue for tax purposes.

Should you rent out your house furnished, you could be also entitled to claim a deduction in respect of the cost of the furnishings (spread over a period of eight years).

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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