Sunday 20 January 2019

Your questions answered: Did late wife owe tax on sale of her home?


(Stock image)
(Stock image)

Patrick McGettigan - Principal at McGettigan Financial Planning

Q Before we married, both my wife and I were lucky enough to have our own individual houses. When we married, my wife moved into my house and rented out her own house. My wife later sold her own house for €280,000, with only a small mortgage of €40,000 remaining. My wife didn't think she was required to pay Capital Gains Tax (CGT) at the time as she bought the house as a single person and it was her private residence for a number of years (before we married). My wife has since passed away and I am worried that she may have been liable for CGT on the property. Was she? Denis, Dublin 5

A liability to CGT arises when the sale proceeds (less the costs incurred while selling) are greater than the original purchase price (plus purchase costs and adjusted for inflation if purchased pre-2003). CGT is charged on such a gain at a rate of 33pc.

Based on the information you have provided, I am speculating that you understand any potential CGT to be chargeable on the difference between the sale price and the outstanding mortgage. This is incorrect - the outstanding mortgage is irrelevant for the purposes of this calculation. Any potential CGT is calculated as mentioned on sale proceeds less the original purchase price.

The second part of your question relates to the tax treatment of a principal private residence (PPR). An individual's PPR is exempt from CGT if the individual has used the house as their PPR throughout the period of ownership. As you have explained, your late wife used the house as her PPR for only part of the ownership period.

Where an individual has not occupied the house as their PPR during the entire ownership, then they may partially avail of PPR relief on a pro-rata basis. The portion of the gain exempt under PPR is calculated by taking the number of complete years the house was occupied as her home over the total number of years that she had ownership of the property.

Dwelling house relief catch

Q I lived with my mother in her house for most of her life. She became quite ill about 15 years ago and I have looked after her since. She passed away recently and left her house to me. My sister and I own a holiday home in Spain which we bought about 10 years ago. We tried to sell it a few years ago but couldn't. Am I eligible for dwelling house relief on my mother's home? It is the only home I have. Gemma, Dublin 8

If you inherit a house and qualify for the dwelling house exemption, you will not have to pay the Capital Acquisition Tax (CAT) liable on the inheritance value of the house. In this situation, you have lived with your mother due to her ill health for the previous 15 years and indicate that you intend living in the home for the foreseeable future. Both points would help to qualify you for the relief.

However, the Revenue Commissioners clearly state in explaining the exemption that you must "not own, have an interest in, or a share in any other house". This rule applies to dwelling houses situated either in the State or abroad.

As you have declared a share in a property in Spain with your sister, this interest will disqualify you from the exemption unfortunately.

Aside from this, as a parental gift, you are entitled to inherit up to €310,000 over your lifetime before becoming liable to any CAT of 33pc.

Cashing in pensions at 50?

Q I am self-employed. I have two pensions: one is a PRSA which I am actively paying into; the other is an occupational pension (defined contribution) which I had when I worked as a full-time employee with a company until recently. I am no longer paying into the occupational pension. I would like to retire at 50. Can I cash in both pensions at that stage - or draw a pension down from them? Sean, Naas, Co Kildare

At the age of 50, you can proceed to draw down the retirement benefits from your paid-up occupational pension on agreement from the trustees of the scheme and from your former employer. The PRSA, however, is being contributed to on a self-employed basis. Benefits therefore can only begin to be taken from this plan from the age of 60 - except in cases of ill health leading to early retirement.

You refer to cashing in the plan. At retirement, you have several options around accessing your plan. You can take 25pc of the plan as a tax-free cash lump sum. This tax-free cash lump sum element is capped at €200,000.

You can then decide what to do with the balance - and you have three options here: purchase an annuity (which is a guaranteed income for life), invest in an Approved (Minimum) Retirement Fund (ARF) which allows you to maintain control of your capital (though you run the risk of outliving your fund), or take the balance as taxable cash. Both the ARF and taxable cash options are subject to having a specified income for life of €12,700 - or €63,500 invested in an AMRF.

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