I’m renting the home of my emigrant brother. What are the tax implications if he signs it over to me?

My brother built a house in Ireland 18 years ago but had to move to Australia 12 years ago during the economic downturn for work. I have been renting his home since then as I needed a home for me and my young child. The rent was half the price of the mortgage repayments so it suited both of us. There is 15 years left on mortgage and I need to know if I give him a lump sum at the end of mortgage can he sign home over to me? What tax implications will apply to both of us if we were to do this.

Ms L.G.

Your brother was one of many homeowners who found themselves scrambling when the Celtic Tiger crashed. A generation of young homebuyers had bought or built property at the top of the market and suddenly found themselves deep underwater.

Their homes were now worth a fraction of what they had paid for them but they were still stuck with eye-watering mortgage payments at a time when many of them were being let go from work. Heading abroad in search of work was what many of them had to do and a booming Australian economy was very attractive.

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Back here, they sought to get tenants into homes they could no longer afford to live in to try to defray the mortgage bills and this is precisely what happened here. The timing clearly suited you as you needed a place and had a very young child at that time. From your brother’s perspective, it meant some help with the mortgage and the reassurance that the tenant was a family member who would look after his home.

If [your rent] is below the market rent for that type of house in that location then the difference between what you are paying and the market rent is a financial gift from him to you

So far, so good. You say the rent you have been paying him is half his mortgage. That’s all right if it has been, in fact, the market rent for the property at the time. And it could be. The financial crash meant market rents were below mortgage bills, although that position has eased over the intervening years.

If, however, it is below the market rent for that type of house in that location then the difference between what you are paying and the market rent is a financial gift from him to you.

That would be offset against the lifetime amount that you can receive from him – alongside anything you receive from any other sibling, or linear relative, such as an uncle, aunt or grandparent. At present that amount is just €32,500 under Category B of the Capital Acquisitions Tax thresholds. Anything you receive over your lifetime above this amount is taxable at 33 per cent and it is you who has to pay that tax.

In tax terms, the other issue to be aware of in relation to the rent you are paying is that your brother is liable for income tax on that money in this State – after allowable costs. He is also liable for USC and should have been filing an income tax return here over the past 12 years to regularise those liabilities.

This is the case despite the fact that he appears to be tax resident in Australia. A rule that applies in most countries is that tax due on physical property located in a country is payable in that country, not necessarily in the country where the person is tax resident. And that is the case here.

The good news for your brother is that, under the double taxation agreement in place between Ireland and Australia, any tax he pays on the rental income here is allowable as a credit against his Australian tax to the extent that that same income is declared and taxed in Australia.

You may have noted that I made no mention of PRSI, which is also generally due on net rental income. That is because landlords who are tax resident abroad do not have to pay PRSI on Irish rental income, although Irish private landlords do.

Lump sum

That brings us to your proposal to pay your brother a lump sum for this house he built when the mortgage ends in around 15 years time as it now appears unlikely that he will be returning to live in the home he built all those years back.

The same concept of gifting applies.

if the property is valued at €400,000 in 15 years time, and you are paying him €250,000 at that time as a lump sum and he transfers the property into your name, the €150,000 shortfall would be seen as a gift

If you pay him the market value of the house, well and good. But if it is less than the market value at the time you are looking to have the house transferred into your name, the shortfall will be seen as a gift. And, just for clarity, rent already paid would not generally be seen as “part payment” for ownership of the property.

So, if the property is valued at €400,000 in 15 years time, and you are paying him €250,000 at that time as a lump sum and he transfers the property into your name, the €150,000 shortfall would be seen as a gift. That is well above the €32,500 threshold and, even if you had never received a gift over the value of €3,000, you would be facing a tax bill of about €50,000 on the transfer in those circumstances.

Gifts up to €3,000 in any given year are covered by something called the small gift exemption. That sum could be used at present to cover part of any gap between the rent you are paying and the market rent – effectively widening the gift tax threshold.

You will also be liable for stamp duty on the purchase. Assuming the rate remains the same in 2038, when you intend making this move, it will be 1 per cent on the actual price paid by you for the property.

[ Tracking down the price at which I bought shares many years ago ]

[ Inheritance: what happens when there’s not enough to pay bequests? ]

The one thing that bugs me here is that, if you are intending to buy your brother out of his ownership of this property, is there some way that the regular payments you are currently making could be structured under a legal agreement as part payment for the ownership of the property, rather than rent?

I have not been able to get a clear answer to this at the moment. Logically, it seems as though it should be possible and might go some way towards filling the gap between the lump sum payment and the value of the home at that time but I simply cannot determine the legal position. I do think it might be worth your while consulting a solicitor on this issue.

Regardless of whether that is possible, your brother will be liable for capital gains tax if he does sell the property. In Ireland, that will be assessed on the portion of any gain covered by the time when he was renting out the property – currently around 61 per cent of his period of ownership but that portion will rise to 79 per cent if we are looking 15 years down the road.

He will also be liable in Australia, where capital gains tax is charged at your income tax rate, apparently, although there are several ways of assessing the capital gain. He will need to work that out but, in any case, he should be able to claim credit for any tax paid in Ireland on any sale under that tax agreement between the two countries.

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