Tax impact of pension digout for children

QI have a substantial pension pot of around €350,000 and I am considering withdrawing around €150,000 of it to help two of our children buy their houses and somewhat reduce the size of their mortgages. The plan would be to give each child €75,000 each. Is there any tax-efficient way I can withdraw such a large sum when I am gifting it to my children — without incurring the normal current tax rate on pension drawdowns? I am currently 61 years of age, I work part-time and I have a small farm. In time, hopefully I will also qualify for a pro-rata contributory State pension. My wife also works part-time and we are jointly assessed but even with all incomes combined, we are still in the lower bracket. Pat, Co Offaly

DEPENDING on your circumstances, there are different pension options for you to consider at retirement. Broadly, you can take a lump sum and can use the balance to avail of a pension income stream (known as an annuity) and/ or reinvest the balance in a further retirement fund, such as an Approved Retirement Fund (ARF).

The amount of cash you can take out depends on the type of arrangement you have. Cash lump sums are tax efficient — up to certain levels. Most people will choose to take the attractive tax-free retirement lump sum option of up to €200,000 from their pension fund, subject to various rules. The tax-free amount is capped at 25pc of your pension — about €88,000 for you.

You mention that you are still in the lower tax bracket, so if the pension rules allow, you could take out a further sum so the amounts subject to lower rate tax are maximised.

Given this income bracket is a maximum of €70,600 for married couples in 2020, it would probably only increase the available lump sum by a modest amount.

A withdrawal of anything further would be subject to top income tax rates. This would not appear to be tax efficient for you, as income in future years would likely still be in lower tax brackets.

A pensions adviser will be able to talk you through options in relation to your pension and work out how much income in retirement you could have after withdrawal of any lump sum. Your wife’s position in the event of your death should also be considered.

You should then be able to make an informed decision taking into account your other income and lifestyle requirements. At that point, you can decide whether you have the capacity to make the proposed gifts. Generally, parental support is most needed by adult children when they are acquiring their home. However, you should ensure that your future is not compromised.

You mention the gifts would reduce the size of your children’s mortgages. Alternatively, you could use any excess annual income or funds to help with your children’s mortgage repayments on an ongoing basis. This would give you further flexibility if your current or future means are not sufficient to make a significant cash gift now.

Any gifts should not give rise to tax issues as your children’s lifetime tax-free Capital Acquisitions Tax (CAT) parent thresholds are €335,000 each. In any case, the first €3,000 of annual gifts received from any person are exempt from CAT.

It would also be wise at this point to consider planning for your entire estate. The farm and family home can be contentious so it is best to put a plan in place and ensure your will is up to date.

Tax dues over house sale to son

QIN 2015, I bought a new house for €145,000 using the proceeds from my Additional Voluntary Contribution (AVC) fund on retirement. The price of the same house in the present building phase is €225,000. I wish to sell the house to my son for €100,000. What, if any, are the tax implications for both my son and myself in such a scenario? Jerry, Waterford City

CAPITAL Gains Tax (CGT), which applies to gains on the sale of assets and is charged at a rate of 33pc, is the main tax to consider here. There is an exemption for disposal of a principal private residence (PPR) — however, I assume this house was never your main residence so PPR relief is not relevant here.

For tax purposes, you are treated as if you sold the house to your son at market value. Whilst the list price on next phase is a good approximation here, you should obtain an independent valuation, especially given the current market.

As well as the purchase price, you can also deduct the costs of acquisition (such as stamp duty and legal costs) from the sale proceeds — and the costs of disposal and enhancement. If you have capital losses, these losses can be used to reduce the taxable gain on the house. You can also claim the €1,270 annual CGT exemption (where the first €1,270 of taxable gains in a tax year are exempt from CGT) to reduce the taxable gain.

Your son will have a stamp duty liability of 1pc of the market value of the property. The difference between the market value and price paid will be regarded as a taxable gift.

However, this should be within his lifetime tax-free threshold of €335,000, assuming he has not received any prior parental gifts or inheritances. If he is subject to gift tax here, then he will be able to reduce this by your CGT liability, where he retains the house for two years.

Fair Deal inheritance implications

QMY mother needs to go into a nursing home and we are applying for the Fair Deal scheme. I am one of five children. In September 2015, we each received a gift from my mother of €25,000 — after she had inherited €125,000 from her brother. As the financial assessment for the purposes of Fair Deal includes any gifts within the last five years, we understand the total amount of €125,000 (that is the five gifts of €25,000 each) now needs to be added to the financial assessment figure. Can we apply for a reassessment for Fair Deal after one year and if so will the ‘gifts’ fall out of the reassessment because they would then be over five years old? Noreen, Co Limerick

YOU are correct that the gifts totalling €125,000 may need to be added to your mother’s financial assessment. The key date for the purposes of the five-year test is the date on which the application for Fair Deal State support is first made. It is the five-year period before that date which is examined for the transfer of assets. This remains the period even on a reassessment at any future time.

If the first application for Fair Deal State support is made in say October 2020 or at any point afterwards, then the gifts will not need to be included in the assessment. To the extent required, your mother or the family could fund any care required in the interim. Tax relief, at up to 40pc, is available for nursing home costs or certain carer costs. Any funding by your mother would also reduce her future assessable means. Note too that support provided under the Fair Deal scheme will not be backdated.

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