Will I escape tax on house bought during recession?
Your questions answered
Q. I have query about the seven-years Capital Gains Tax (CGT) exemption which is now applying to many people who bought property in the recession. I bought a house in February 2012 and rented it out from February 2012 until January 2019. I now plan to move back into the house as my primary residence.
My question is: if I sell the house in future years, is it totally free of CGT? My understanding is that the first seven years of ownership (when rented out) fall under the CGT exemption - and that any further years will also be exempt from CGT as it will be my primary residence. Is that correct?
Brian, Co Kerry
A. In short, you are correct in your understanding of the tax reliefs available to you. Any gain relating to the first seven years of ownership will be eligible for CGT relief. In addition, any years where property is considered as your principal private residence (PPR) will qualify for the CGT PPR exemption. (With the PPR exemption, when you transfer or sell a property you will be exempt from CGT if that property was your main residence while you owned it.)
To give you a better sense of your tax position in this situation I will deal with the two relevant tax reliefs separately.
The tax legislation in Section 604A TCA 1997 allows for CGT relief on the disposal of land and buildings which were bought at any stage between December 7, 2011 and December 31, 2014. To benefit for the release in full, you must have held the property for at least four years - and up to seven years. In your case, the property will have been held for more than seven years, so the relief received upon the sale of the property will be discounted by the total number of years the property is held - less the period of seven years.
With regard to PPR relief, where the house is not occupied as a principal private residence during the whole period of ownership, only the proportion of the gain applicable to the period of occupation is exempt. So, if you have let or used the house for business purposes, PPR relief will be restricted. Also, if you have not lived in the house as your only or main home for all the time that you have owned it, PPR relief may also be restricted. Revenue however will regard you as having lived in the house for 12 months prior to the sale - to allow for a situation whereby you have moved into a new home, but are still trying to sell your previous residence.
Inheritance tax woes
Q. My father died about three years ago. Probate was granted in spring 2018 as the estate was quite complex. I am to receive about €400,000 out of the estate. The bulk of the inheritance is coming from the sale of the family home - which so far hasn't sold. As part of my inheritance, earlier this year, I received €100,000 from my late father's bank account. This is the only amount I have received since my father passed away. I recently completed a MED 1 form - to claim tax relief on medical expenses incurred in 2018. However, Revenue has written to me saying that my IT38 (inheritance tax return form) for 2018 is overdue and that it will not be releasing the MED1 refund until I complete this form. Should I have paid the inheritance tax on the difference between the €310,000 and the €400,000 before I ever received any monies? To date, I have only received €100,000. I assumed I didn't have to pay any inheritance tax until I received over €310,000. I have used the €100,000 to pay off my mortgage. Also, although the family home has been for sale for almost a year, there is little interest in the property and it looks like it isn't going to realise the probate valuation. Would you have any advice on what I can do if the house doesn't sell - and I don't have cash to settle the inheritance tax bill as a result? Also, if the house is sold for less than the probate valuation, what will the final inheritance tax bill be based on - the probate valuation or the actual sale figure?
Joe, Co Cork
A. The main factors which affect the amount of inheritance tax are the Capital Acquisitions Tax (CAT) rate, the taxable value of the inheritance, and the CAT-free group thresholds. (These group thresholds allow individuals to inherit a certain amount tax-free over their lifetime - depending on their relationship to the person giving them the inheritance). As the deceased is your father, you fall into the Group A threshold. From October 2018 the Group A inheritance threshold amount was set at €320,000 - however, before this date it stood at €310,000. For group threshold purposes and to apply the correct CAT rate, the date of inheritance is the date of death of your late father, which means that the threshold of €310,000 applies to you - and so you can inherit up to €310,000 tax-free from your father over your lifetime.
You do not have to pay CAT on an inheritance if the value of the inheritance is below your group threshold amount.
The date on which the market value of the inheritance is established is called a "valuation date". The date of the Grant of Probate is taken as the "appropriate valuation date" for a benefit of the residue of an estate. If your father has directed in his will that the property be sold, and the proceeds divided amongst beneficiaries, then the valuation date will be the date of sale.
The valuation date will also determine when the tax should be paid.
As the probate was granted in spring 2018, assuming there was not a direction to the contrary in the will, the deadline for your CAT return and CAT payment was October 31, 2018.
The last part of your question relates to a situation where the house sells for less than the probate valuation.
A subsequent sale at a lower amount than the probate valuation will not entitle you to pay less CAT or to reclaim any CAT already paid in excess. However, you can lodge an appeal to the Revenue Commissioners asking for a review in the valuation. In terms of repaying any tax due, in certain circumstances, Revenue may agree payment of liability in instalments.
Q. My granddaughter, aged 16, lives with me. I am 74. I want to will her my house. Will she qualify for dwelling house relief on the inheritance? I know she has to keep the house for six years after I die.
Mary, Co Kilkenny
A. Yes, based on the information you have given, your granddaughter should qualify for dwelling house relief, provided she meets the following criteria: she lived in the house as her only or main home for three years before your death and that she does not own, or have an interest or share in, any other house.
You are correct in your assumption that the house in question must remain her home for six years after the inheritance to qualify for the relief.
Eileen Devereux is commercial director with Taxback.com
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