Tuesday 22 August 2017

Your Questions: Will my daughter face a tax bill if I pay for house to be built for myself in her garden?

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Christine Keily

I am retired and have recently received planning permission to build a house in my daughter's garden. As she owns the site, the house will be owned by her - but I will live in it. I would like to pay for the building of the house.

Some years ago, I gifted my daughter some valuable farmland, which means that she has already used up her full lifetime inheritance tax-free threshold. Does this mean that she will now have to pay gift tax on the full value of the new house I am building, even though it is being built for me?

Nora, Galway

The amount you anticipate investing in the building of the house will be regarded as a gift from you to your daughter. As she has already used up her full life-time inheritance tax-free threshold, the full amount invested will be subject to Capital Acquisitions Tax (CAT) at 33pc.

There is an option for you, rather than your daughter, to pay the CAT liability arising. In such case, the gift is taken free of tax and is deemed to include the amount of tax chargeable on the initial gift. Let's say for example that you pay €200,000 for the building of the house. The CAT bill which would typically arise on such a gift would be €66,000. Should you pay the CAT bill on behalf of your daughter, she will be deemed to have received a further benefit of €66,000. Therefore, the final tax liability for you to pay on her behalf will include the €66,000 tax bill on the initial €200,000 gift - as well as €21,780 tax on the deemed €66,000 benefit. This would bring your final tax liability to €87,780.

Alternatively, you could provide an interest-free loan to your daughter of the amount invested for the building of the house. She may then build the house with the funds gifted by you. Your daughter may pay back the loan over a set number of years. If you ever forgive the loan, CAT at 33pc will be due on the amount forgiven.

The interest-free loan will also generate a CAT liability for your daughter. The amount of the gift is a notional sum - based on the highest rate of return that you could obtain on investing the funds on deposit at the open market. For example, if you could earn 1.5pc interest on deposit, the amount of the benefit subject to CAT is calculated at a rate of 1.5pc per annum. You daughter may avail of the annual small gift exemption of €3,000. Under that exemption, every individual is entitled to receive up to €3,000 of tax-free gifts a year from another individual. So should the value of her interest-free loan be deemed to be less than €3,000 a year, the interest-free loan would not attract a CAT bill.

You will also have CAT obligations for the free occupation of your daughter's house. A CAT liability will arise on the use and occupation of a property by an individual who is not beneficially entitled in position to a property. You will be deemed to receive a gift of the value of the use of the property every year. The amount subject to CAT is the open market value of the rent forgone and may be reduced by the small gift exemption of €3,000 each year.

You may be able to use your inheritance tax lifetime tax-free threshold to reduce your tax bill. Under this threshold, you can receive up to €32,500 worth of gifts tax-free from your daughter over your lifetime.

Another option would be for your daughter to create a life interest for you in the property. The CAT liability in such cases depends on the value of the property, your age and gender. To determine the more tax-efficient way to structure the occupation of the property, detailed computations should be prepared. Hire a tax professional for specific guidance in this regard.

My son spent last summer working as a labourer in Montauk. He earned a lot of money. which he has since spent on buying his first car. A friend of mine said her daughter spent the summer in Canada a few years ago and was able to get some of her tax back when she got back to Ireland - would my son be eligible for anything similar?

Christine, Newbridge, Co Kildare

Generally, young people going to work in the United States for the summer months hold a J-1 Work and Travel visa - and would most likely then have had US taxes withheld from their earnings. Usually J-1 visa holders can reclaim most - if not all, of the US taxes paid during this period. The amount of tax refunded generally depends on the amount of income earned and the time spent in the US. As your son worked in New York State, he may be entitled to refunds of both Federal and New York State taxes.

Some employers are not familiar with the tax regulation for J-1 visa holders and improperly withhold social security and Medicare taxes (known as FICA taxes). The Internal Revenue Service will usually refund all of the FICA taxes in respect of refund claims made by J1 visa holders.

Overpaid taxes can be claimed by filing a US tax return. To prepare an income tax return, your son will need to provide US income documents (usually a W-2 form), which should have been issued to him by his employer after the end of the tax year. This document will include details of his US income and taxes paid (Federal, State and/or FICA). If for some reason your son is unable to obtain his W-2, a final cumulative pay slip may be accepted by the US authorities to process the refund. All individuals who visit the US on a J-1 visa are required by law to file a US tax return.

As an Irish resident individual, your son may also be taxable in Ireland on the income he earned in the US, even though it was earned outside of Ireland. If this is the case, he will be required to file an Irish tax return. Depending on the level of his worldwide income for the year, he may not have any Irish taxes to pay as his personal tax credits could cover any tax liability arising. However, it is always important to consider the home country tax obligations whenever looking at a refund in another location.

I filed my tax return earlier this year. I arranged to have the total amount of tax due - €8,000 - come out of my bank account. However, when I checked my bank statement recently, I noticed that Revenue had deducted €8,400 instead of €8,000. Have I been overcharged or is there a reason for the extra charge?

Peadar, Birr, Co Offaly

People often use a Revenue Debit Instruction (RDI) when paying income tax returns online. With an RDI, you set out the amount that the Revenue Commissioners is authorised to debit from your account, the details of the account, and the date the amount should be debited from your account. Revenue are not authorised to take any sum from your account other than the amount as set out in your RDI.

You should contact Revenue to advise them of your understanding of the position and request confirmation of why an amount other than the amount you instructed was debited from your account.

Regardless of your final liability due to Revenue, the only amount it is authorised to debit from your account is the amount you instructed in your RDI and if it is determined that you have underpaid tax, you would need to make a further payment to Revenue via RDI or otherwise. An RDI does not grant Revenue permission to take funds from your account as they wish. If an amount in excess of the amount due as per Revenue records has been transferred in error, you will be entitled to a refund of the excess..

Christine Keily is tax director at Taxback.com

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