Calculating capital gains tax liability on second property

Q&A:I own a house in a Dublin suburb and 11 years ago I bought the building directly beside me. It was in bad condition and I paid very little for it. It was a derelict building with no roof on it - the roof was taken off because it was considered a danger.

So this building is a shell on its own ground, with its own deeds. It used be a small, very run-down shop, but it ceased trading about 1994.

My question is: if I sell my house (a two-bedroom with a small garden) plus the adjoining derelict building, which is of modest size and has a small garden, would I be liable for capital gains tax on this derelict building?

I feel the fact that I have two deeds means I may be liable for capital gains tax, although I would hope not to pay any such tax. I am considering selling the properties with a view to relocating elsewhere. The potential buyer would either be someone who would buy the properties to make one big house out of them or possibly a builder or developer. They could merely use my extra site as a garden - who knows?

- Mr B McG, Dublin

I think that whatever way you look at it you are going to face a tax liability. These are, as you say, two distinct properties with their own boundaries and deeds. What any ultimate buyer - assuming you sell them as one lot - or buyers does with the properties or sites will not affect your liability.

You point out that the site next to you was effectively derelict when you bought it and that, as such, you paid a low price for it. Had you restored or upgraded it in the past decade, you might well have been able to access tax relief on grants.

However, given that it is still derelict, it will inevitably attract a lower price than your own property, and this may reduce any potential capital gains tax liability. Ultimately, however, you are only allowed one principal private residence which is free of capital gains tax liability on sale, and that is your original property. This second property was clearly an asset you acquired as an investment and the basis of the capital gains tax code is that you are taxed on the gain accrued over the period of ownership of an asset - property or otherwise.

The usual provisions allowing you to deduct costs incurred with the purchase and sale of the asset and an indexation measure to inflation-proof your purchase cost between 1996 and the end of 2002 can also be applied to reduce any liability.

Iseq stamp duty

I'm surprised that no one is protesting at the rate of stamp duty charged in buying shares on the Iseq. Our rate is 1 per cent, twice that of the UK. France, Switzerland and Italy have a low rate (0.15 per cent), while Germany, the Netherlands and Sweden have no such tax.

- M.P., Kerry

It wouldn't be correct to say that no one is protesting about the rate. The stockbroking industry regularly lobbies the Minister for Finance on the subject on precisely the grounds you mention. The broader funds industry, which forks out the majority of the stamp duty collected on such transactions, is also generally vociferous on the issue around budget time.

As you say, we appear to be out of alignment with our European partners in this area. It wasn't so much of an issue some years ago when the UK charged stamp duty on the acquisition and sale of shares - each at half a percentage point of the transaction - which meant that the total duty per transaction was the same as in the Irish market. In political terms you might see that there is less kudos in amending stamp duty on stock market transactions - where, apart from the fund managers, the major investors tend to come from the more affluent part of society - than for, say, amending stamp duty on property transactions, which affects most voters. I imagine there will be little impetus to amend the rules until such time as it is seen to be undermining our efforts to attract foreign business.

Given the small size of the Irish Stock Exchange and the dearth of small-scale investors - many still chastened by their Eircom experience - I wouldn't expect change anytime soon.

Tax break for wills

I am a widower and have made a will leaving my estate to be divided equally between my three daughters and four sons. I have a recollection that I read in The Irish Times that, where a testator donates a sum not exceeding €3,000 during any tax year in which he survives, this will not be taken into account for probate purposes as an advancement of his/her legacy. Could you please advise me what the current maximum amount of such an exemption may be. I have noticed no reference in recent budget statements indicating an adjustment in the allowance to cater for the changes in the cost of living.

- Mr S.O'H, Dublin

You are quite right when you state that any testator can donate a sum of €3,000 in any calendar year to any beneficiary - it does not even have to be family or someone who will ultimately benefit under a will - and such a sum will be exempt under the capital acquisitions tax (inheritance/gift tax) regime.

It will not adversely affect the capital acquisitions tax threshold for that person in relation to any subsequent bequest.

The figure is still €3,000 and you are correct to say that that has not changed for a couple of years.

However, when it was last increased, it went from €1,000 to €3,000, so it has probably kept up with changes in the cost of living in the past few years.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle@irish-times.ie.

This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered in the newspaper. No personal correspondence will be entered into.