Will son and his girl­friend face a tax bill if we let them live rent-free in our sec­ond home?

Sunday Independent (Ireland) - - Your Money -

YOUR QUES­TIONS OONAGH CASEY GREHAN Tax part­ner Fa­gan & Part­ners (f-p.ie)

WE have a three-bed­roomed semide­tached prop­erty which we have rented out for the past 18 years. The lease to the most re­cent ten­ants has now ex­pired and we have de­cided to al­low our son and his girl­friend move into the house. We are not sign­ing over the prop­erty to our son. How­ever, we are al­low­ing him to live in the prop­erty rent-free. Are there any tax im­pli­ca­tions for our son as a re­sult of us do­ing this? Would he be li­able for ben­e­fit-inkind? We were get­ting €700 monthly rent for the house.

Phyl­lis, Kil­main­ham, Dublin 8

I AM as­sum­ing that this prop­erty is owned jointly by you and your spouse. If you pro­vide rent-free ac­com­mo­da­tion to a child who is ei­ther un­der 18 — or un­der 25 and in Third-level ed­u­ca­tion, the free ac­com­mo­da­tion is ex­empt from gift/ in­her­i­tance tax. Oth­er­wise, the pro­vi­sion of free ac­com­mo­da­tion that is not in the fam­ily home is deemed to be a gift.

Should the free ac­com­mo­da­tion be deemed to be a gift, both you and your spouse can each give an an­nual tax-free gift to the value of €3,000 to your son — and also to his girl­friend. (There does not have to be a fam­ily re­la­tion­ship to claim this tax-free ex­emp­tion). So in to­tal, your son and his girl­friend could get tax-free gifts worth up to €12,000 a year from you and your spouse. The an­nual value of the rent is €8,400 (€700 by 12 months). As this is less than the an­nual tax-free ex­emp­tion that can be claimed by your son and his girl­friend, the gift would be tax-free.

Even if the mar­ket value of the rent ex­ceeded the an­nual gift thresh­old, the fact that you are pro­vid­ing a “gift” of free ac­com­mo­da­tion does not au­to­mat­i­cally trig­ger a tax bill if you give the gift to your son, as there is a life­time tax-free thresh­old of €310,000 be­tween par­ents and a child. Any ex­cess of the rent over the an­nual gift ex­emp­tion would be cov­ered by us­ing up some of the life­time thresh­old. Based on the cur­rent mar­ket value, as the rent does not ex­ceed the an­nual gift ex­emp­tion, the life­time tax-free thresh­old be­tween you and your son is un­touched.

Ben­e­fit-in-kind only ap­plies if an em­ployer pro­vides a ben­e­fit to an em­ployee. It wouldn’t be rel­e­vant in a fam­ily sit­u­a­tion — un­less there is also an em­ploy­ment ar­range­ment in place. I BOUGHT the fam­ily home 12 years ago. I lived there for a while but now don’t. How­ever, my 83-year-old fa­ther does. When he passes away, I want to sell up. Will I face any tax is­sues when I sell?

James, Bray, Co Wick­low

OR­DI­NAR­ILY when you sell a prop­erty that is not your prin­ci­pal pri­vate res­i­dence, the dis­posal of this prop­erty is po­ten­tially sub­ject to Cap­i­tal Gains Tax (CGT) — if the prop­erty has in­creased in value since ac­qui­si­tion.

How­ever in the case where a home is pro­vided to a rel­a­tive, there is an ex­emp­tion from CGT that can be claimed if cer­tain con­di­tions are met. This re­lief is the Prin­ci­pal Pri­vate Res­i­dence (PPR) re­lief and it ap­plies where a prop­erty is pro­vided rent-free to a “de­pen­dant rel­a­tive”.

A de­pen­dant rel­a­tive for this pur­pose is ei­ther a wid­owed par­ent, or a rel­a­tive of ei­ther your­self or your spouse, who is in­ca­pac­i­tated by old age or in­fir­mity from main­tain­ing him­self or her­self. The re­quire­ment that the rel­a­tive be in­ca­pac­i­tated by old age or in­fir­mity only ap­plies to a rel­a­tive who is not ei­ther a wid­owed mother or fa­ther. The leg­is­la­tion gov­ern­ing this issue does not in­clude a re­quire­ment that you pro­vide for the up­keep of this rel­a­tive — only that the prop­erty is pro­vided rent-free to the de­pen­dent rel­a­tive as a home.

You don’t men­tion if your fa­ther is wid­owed or not. How­ever, if he isn’t, as he is 83 and you pro­vide the house to him rent-free, he would also qual­ify as a de­pen­dent rel­a­tive, and there­fore al­low the PPR ex­emp­tion to ap­ply. ARE there cases where an in­di­vid­ual with a pri­vate pen­sion wouldn’t be en­ti­tled to a tax-free lump sum at re­tire­ment? Would a tax-free re­dun­dancy pay­ment five years ear­lier rule one out from re­ceiv­ing a tax-free lump sum from their pen­sion?

John, Ra­heny, Dublin 5

GEN­ER­ALLY, if you have a per­sonal pen­sion plan or a Per­sonal Re­tire­ment Sav­ings Ac­count (PRSA), you are en­ti­tled to a tax-free lump sum on re­tire­ment. If you have more than one pen­sion plan, the max­i­mum amount you can take by way of tax-free lump sums from all of your pen­sion plans is €200,000 — and this is a life­time limit.

The only in­stance whereby you would not be able to take a tax-free lump sum from your pen­sion plan is if you had pre­vi­ously waived your right to do so. This op­tion to waive your right to take a pen­sion lump sum is nor­mally avail­able when you take a re­dun­dancy ex-gra­tia pay­ment when leav­ing an em­ploy­ment. By ex­er­cis­ing this op­tion, this in­creases the amount you can take tax-free at re­dun­dancy, rather than at re­tire­ment. So if you trans­fer your oc­cu­pa­tional pen­sion con­tri­bu­tions to a per­sonal re­tire­ment bond or buy-out bond, the fact that you have waived the right to a tax-free lump sum on re­tire­ment for that fund fol­lows into the bond. To an­swer your sec­ond ques­tion, tak­ing

a tax-free re­dun­dancy pay­ment will not au­to­mat­i­cally rule you out from tak­ing a taxfree lump sum from your pen­sion fund. It only ap­plies if, at the time of re­dun­dancy, you opt to waive your right to take the tax-free lump sum at re­tire­ment. It may be that the tax ex­emp­tion avail­able to you is suf­fi­cient to cover the ex-gra­tia pay­ment your em­ployer is of­fer­ing you — or the amount that isn’t tax-free is min­i­mal.

If you de­cided to waive the right to take a lump sum on re­tire­ment, it only ap­plies to that par­tic­u­lar pen­sion fund. I HAVE a fam­ily home in Dublin and I also have a hol­i­day home in West Cork, which I hope to gift to my chil­dren in my will. The West Cork house is used only for fam­ily hol­i­days. What would be the tax im­pli­ca­tions of gift­ing the sum­mer home to my chil­dren? Also, if we were to let out the sum­mer house, what would be the tax im­pli­ca­tions of do­ing so?

John, Bal­doyle, Dublin

IF gift­ing the sum­mer house un­der your will, the value of the prop­erty will be in­cluded in your es­tate and each child’s share will only be tax­able if their to­tal in­her­i­tance (in­clud­ing any pre­vi­ous gifts or in­her­i­tances taken from you or their mother) ex­ceeds the in­her­i­tance tax-free thresh­old which ap­plies be­tween a child and their par­ents. That thresh­old is €310,000. There will be no im­pli­ca­tions for you or your es­tate as there is no Cap­i­tal Gains Tax (CGT) on death.

If you gift this prop­erty to them now, the same rules ap­ply in that it will only be tax­able if the tax-free thresh­old of €310,000 is ex­ceeded. If, how­ever, the prop­erty had ap­pre­ci­ated in value since you bought it orig­i­nally, there could be a CGT bill for you as you are dis­pos­ing/trans­fer­ring own­er­ship of a prop­erty that is not your prin­ci­pal pri­vate res­i­dence — re­gard­less of whether it has been let or not, and re­gard­less of the fact that you are not sell­ing it but only gift­ing it.

If you let the sum­mer house out, any rental in­come aris­ing will be tax­able in the hands of the own­ers (be it you or your chil­dren), and the nor­mal tax rental in­come tax rules will ap­ply.

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