Building back home when we’re living in the UK

My fiancee and I live in the United Kingdom. We have been gifted a garden site valued under €310,000, and under one acre by my fiancee's parents to build a house for us to use as our primary residence when we move back to Dublin.

As we earn sterling and live in the UK, we are ineligible for a mortgage in Ireland. Our plan would be to build the house before moving home.

If we were to get a loan from my parents to build the house before then applying for a mortgage to repay that loan, what tax/charges would we be liable for?

The building cost of the house would be €385,000 while the value of the property including the site on completion would be almost €600,000.

Do my elderly parents need to make a will?

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Mr E.P., email

You’re right to consider the issues of taxes and charges in a situation like this with several parties involved and a multi-stage building and financing project.

So what taxes do you have to consider?

Well, for your fiancee's parents, capital gains tax is an obvious one. For you and your fiancée, capital acquisitions tax (inheritance or gift tax) and stamp duty are the ones that come to mind.

That sounds like a lot of complications but, in fairness, only one of them is likely to be so.

Let’s get capital gains out of the way. In ordinary circumstances, your fiancee’s parents would potentially be liable on capital gains tax on the disposal of a site – especially if it is deemed to have development potential. However, the transfer of a site to a child is exempt from CGT as long as the site is less than one acre in size and valued at less than €500,000.

So, in the circumstances you outline, your fiancee’s parents have no tax concerns in transferring this property to you.

Next, let’s consider stamp duty. The rate of stamp duty applicable depends on whether the land is considered residential or non-residential. Ordinarily, a site would be considered non-residential. However, if the land is transferred with an agreement to build a home on it, it qualifies as residential.

That’s important as the stamp duty rates are substantially different. As this land would appear to fall under the rules as residential in the circumstances – and is worth less than €1 million – the stamp duty is 1 per cent. However, this 1 per cent is on the value both of the land and of the construction (minus any VAT).

Different rates of VAT apply to all sorts of different elements of construction but, using the reduced 13.5 per cent rate that should apply to much of the project – your ex-VAT construction price is just under €340,000.

On that basis, and also accounting for the site value, you are likely to face a stamp duty bill of about €6,500.

Which brings us to gift tax. While there may be no tax owing by your fiancee’s parents, the same is not necessarily true of you two. There is a limit to the scale of gifts that anyone can receive under Irish tax law.

At the moment, the threshold for a child receiving from their parents is €310,000. And this is cumulative. So, any gifts (or inheritances) received by your fiancee from her parents over her lifetime (apart from an annual small gift exemption of €3,000) must be totted up to assess whether she is under or over the threshold.

As this site is precisely on the threshold, Revenue will look closely to make sure no tax is due – and will certainly want a confirmation of the site value by way of an official valuation from a surveyor.

That brings us to the loan from your parents. If the loan is not charging a commercial rate of interest, the Revenue can consider it a gift – at least in relation to that interest. The rate they use is the “specified rate of interest” set down by the Department of Finance. As I understand it, that rate – in relation to home loans such as this – is currently 4 per cent.

On your €385,000 building cost, that amounts to €15,400 per annum.

Your options are:

– pay this annually to your parents;

– set it against your own lifetime gift/inheritance threshold under CAT of €310,000;

– if your parents are agreeable, consider up to €12,000 of it as a small gift exemption from each of your two parents to each of you and your fiancee. That’s €3,000 from each parent to you and, separately, €3,000 for each of your parents to your fiancee. You can then pay the balance or set it against your lifetime CAT limit.

Lots of people go to extremes to preserve their CAT threshold to defray the tax bill on an eventual inheritance but, if the need is greater now when you are trying to establish a new home back here, what’s the problem tapping that threshold – or some of it – now?

Finally, living abroad, you won’t be eligible for the help to buy scheme which would have saved you up to €20,000, as neither of you would have an Irish income tax record in the past four years to qualify.

Just to clear up one thing – semantic difference though it may be. Your living abroad does not make you ineligible to apply for an Irish mortgage. EU rules, as I understand it, prohibit lenders from discriminating against people from other EU member states, which the UK is, at least for the time being.

However, it is correct to say that, in real terms, it is hard to see any Irish lender accepting a mortgage loan application from you... and the same applies to UK lenders even though they, too, can technically lend for purchases in other EU states.

And how do they get away with an effective ban despite the EU non-discrimination rules? Rules or no rules, banks must still carry out a risk assessment on any lending decision. And if the security is in another legal jurisdiction – ie the property – most UK lenders would steer clear. This is even more so in an environment where the UK expects to be outside the EU well before the end of the mortgage term.

Banks are also very leery about lending to people living in another jurisdiction, again because it can be harder and more expensive to pursue them if things go wrong. And again, the imminent Brexit only strengthens a bank’s risk case for refusing such loans.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.