Monday 21 May 2018

Will surviving sibling face death tax bill?



John Byrne Tax partner, Crowe Horwath

Q: My sister and I live in the same home, which we jointly own. The value of the home is between €150,000 and €170,000. We also have €280,000 in a joint bank account. We are both retired. Should one of us pass away, and the surviving sibling then own the house and money in the joint account, will there be any tax implications for that surviving sibling? Sean, Tipperary

Under inheritance tax rules, where an asset is jointly owned, a potential liability to inheritance tax arises for the surviving owner on the value inherited from the deceased owner.

There is an exemption available for the inheritance of a dwelling house. Applying the rules to your case, the exemption is available as long as all of these conditions are met - first, that the house was occupied as the only or main residence of the deceased sibling at the date of their death; second, that the house was occupied by the surviving sibling as their only or main residence for the three years preceding the date of the inheritance; and third, that it is the only dwelling house in which the surviving sibling has a beneficial interest at the date of the inheritance.

Provided all these conditions are met, the inheritance of half of the value of your home (that is, the half inherited by the surviving sibling) should be exempt from inheritance tax.

Unfortunately, there is no such relief for monies held in a joint bank account. So the surviving sibling would be deemed to take an inheritance of approximately €140,000 from the deceased sibling (that is, the half of the money in the joint account which is inherited by the surviving sibling). Assuming that the surviving sibling has not received any other gifts or inheritance, they should be entitled to claim a tax-free threshold of €32,500 in respect of the inheritance, thereby reducing the taxable value to €107,500. Based on the current inheritance tax rate of 33pc, a tax liability of €35,475 will result.

Furthermore, it is worth noting that where there is more than €50,000 in a joint bank account (other than a current account), the bank cannot pay out any funds from the account after the death of one of the account holders without first obtaining a tax clearance certificate from the Revenue Commissioners.

Alternatives to tax shield

Q I have a number of rental properties that produce a good rental income. I have a Section 23 allowance that shields the income tax, though I still have to pay USC and PRSI on the rental income. My dilemma is that the Section 23 allowance is due to run out at the end of 2018. Therefore, I will be hit with a large tax bill from 2019. What would be the best strategy to minimise the future tax liability? Should I transfer the properties into a company and take annual dividends? Should I set up a discretionary trust arrangement? Or is there another better option? Brendan, Skerries, Co Dublin

From 2019, you will be liable to income tax at a marginal tax rate of up to 55pc. Some potential good news for you is that the Government plans to eliminate the restriction on claiming tax relief on the interest incurred in respect of borrowings on residential rental properties. In 2017, landlords are able to deduct 80pc of the interest cost from their tax bill and by 2021, landlords will be able to claim tax relief on the full interest bill.

You mention some options to reduce tax on your rental income. Should you transfer the properties to a company, the properties would be deemed to transfer at their current market value. A liability to stamp duty and Capital Gains Tax (CGT) - assuming a gain - would arise on the transfers. The company would be liable to corporation tax of 25pc on the rental income and if it did not distribute all the profits to you, this tax rate would increase to 40pc on the undistributed income (due to the imposition of a surcharge on rental income for companies such as you propose). You would remain liable to income tax at rates of up to 55pc on any dividends received from the company. This could increase the marginal tax rate on rental profits to a rate in excess of 66pc.

Should you transfer the properties to a discretionary trust, similar liabilities to CGT and stamp duty arise - as outlined above. The trustees would be liable to income tax at 20pc on the rental profits. However, where the trustees distribute the rents earned by the trust to beneficiaries (including you), the beneficiaries will be liable to income tax at full marginal rates on the funds received - with a credit for the tax paid by the trustees of the trust. The trust is also liable to a surcharge of 20pc on undistributed income. CGT might also arise on the winding up of the trust.

You should consider availing of the Employment and Investment Incentive Scheme which provides for tax relief against all income, including rental income, for amounts invested in qualifying companies. Relief of up to 30pc of the investment is available for the year in which the investment is made - with a further relief of up to 10pc available at the end of four years. The maximum investment on which relief can be claimed is €150,000 in any one year.

If your spouse or partner is not in receipt of income, consider transferring some rental properties to them (subject to any mortgage considerations) to maximise the benefit of standard rate tax bands available to them.

Restaurant sale rules

Q I have owned a small restaurant business for the past 12 years and paid rent for the premises until two years ago, when I bought the building. I am over 55. Would I be entitled to 100pc Capital Gains Tax (CGT) retirement relief if I sold up as a going concern? Seamus, Galway City

Retirement relief is available to individuals aged over 55 who dispose of their business. For individuals aged between 55 and 65, the relief applies where the value of the business is less than €750,000 and for individuals aged 66 and over, this is reduced to €500,000.

The relief is available on the disposal of chargeable businesses' assets - that is, assets, or an interest in assets, which are used by the individual for the purposes of their trade and owned by the individual for a minimum of 10 years prior to the disposal.

In your case, you have held a lease on the premises for 10 years and have been the owner of the property for the last two years.

Using a strict interpretation of the rules, the ownership of the property is a separate asset to the leasehold interest in the property. Therefore, any gain attributable to the disposal of the building would not qualify for retirement relief under a strict interpretation of the tax legislation. Given that you have only owned the property for two years, the gain may not be significant.

It may be possible to make a strong argument that you have held an interest in the property (the lease) for 10 years and owned the same property for a further two years and that these periods of ownership could be combined. However advance Revenue agreement should be sought on this interpretation.

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