Hidden tax issues in purchase of home from father-in-law

My father-in-law has offered to sell an investment property to my wife and I for €300k. The current market value for this house is approximately €350k. He paid €200k a number of years ago.

My question is, given the fact that CGT is calculated at 33 per cent on the gain or “profit” of the asset, will selling below market value to us incur any CAT or other financial liability to the revenue.

Mr J.H., email

Quite a few variations of this sort of question have crossed my desk in the past few weeks and it is clear that more and more relatives are helping younger family members get on the housing ladder by selling them property at a discount. It’s a depressing sign of the times in some ways though at least these families have property assets that they can choose to pass on to younger family members at discounted rates.

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The first thing to get one's head around is the very different nature of capital acquisitions tax and capital gains tax. The former is one that is levied on the beneficiary of a gift or inheritance; the latter is an issue for the person making the gift. Occasionally these are confused, not least as both taxes are generally levied at the same rate – 33 per cent.

This is an investment property, so if it is sold or gifted on ahead of the owner’s death, there will be a capital gains tax liability. That will be calculated as the difference between the market value at the time the property is sold to you – not the price you pay – and the price he originally paid.

He will be entitled to deduct costs incurred with the purchase, letting and sale of the property but nothing else. Unless it was acquired before 2003, he will not be able to apply any indexation factor that rebases the purchase price to allow for inflation.

Of course, he will still be able to avail of exemption to capital gains tax of the first €1,270 of any gain made in a given year through the sale of assets though that is unlikely to benefit him greatly.

He can also offset losses made on any other asset that he sells either in the same year or carries over from previous years.

In this case, assuming no offset expenses or losses and on the basis that this has always been an investment property, your father-in-law is looking at a tax bill of about €50,000 on a capital gain of €150,000.

So where does that leave you?

Even though your father-in-law is liable on tax on the full current value of the property, he is looking to sell to you and your wife at a lower sum. That presents issues for you both – and how that plays out depends on exactly how the transfer is made.

You are benefiting effectively to the tune of €50,000 – the difference between the price to you and the current market valuation.

Gift

That raises issues for you two under capital acquisitions tax (CAT) as this €50,000 is essentially a gift. Your wife, as his daughter, has a CAT threshold of €320,000 – ie she can receive up to €320,000 in large gifts and inheritances cumulatively from her parents before she becomes liable for CAT.

So if the property is sold by your father-in-law to her in her name only, she is merely eating into her tax-free allowance. That has no effect on her now – unless she has previously inherited substantially from her mother or been gifted significant sums – although it might affect her tax position on any subsequent inheritance.

But if the property is sold in both your names, half of the gift is apportioned to you and, despite your marriage, in CAT terms you are a stranger to your father-in-law.

The CAT regime is pretty straightforward. There are three categories which are broadly: parent to child; between blood relatives; everyone else. As you don’t fit in either of the first two, you default to the last – ie a stranger in blood.

And the issue here is that the tax-free threshold for this group, category C, is an altogether more modest €16,250.

If you and your wife are sharing a €50,000 gift, Revenue would deem it split 50/50 leaving you with a gift worth €25,000 from your father-in-law – €8,750 in excess of your tax-free threshold even if you never received a gift or inheritance from a non-relative previously.

That could mean a tax bill of €2.917 for you, although, on the plus side, it means your wife uses up less of her tax-free threshold , assuming she will ultimately inherit from her parents.

I mentioned “ahead of the owner’s death” earlier because there is a provision in the capital gains tax code that any liability to CGT dies with the owner of the asset.

However, if your father-in-law was to look to avoid liability in that way, while still allowing you and your wife to live there in the interim, you both would be faced with a potential gift tax obligation on any shortfall between the rent paid and the market rent for the property.

[ dcoyle@irishtimes.com ]