Gifting cottage to my son will cost me €46,000 in tax

I own a two-bedroom cottage in Dublin. I bought it in 1988 with my late husband for £28,000. We used it as a holiday home.

In recent years, I rented it out. My tenant left about a year ago. My tax returns are up to date as regards this income.

I plan to give this cottage to my son, who is returning from abroad later this year with his wife and family. He intends to live there and plans to add an extension before he moves in.

I have receipts for €20,000 for work carried out on the property in 2011. I haven’t had the property valued yet but I reckon it is worth €200,000 approximately.

Can I backdate small gift exemption for my young children?

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Can I see my father’s previous wills?

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How can I view my dead brother’s will if I’m not the executor?

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Bank leaked my loan request to family who tried to rip me off

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My question is: am I liable for capital gains tax on this property and, if so, approximately how much?

Ms E.G., email

The simple answer is that, yes, you will be liable for capital gains. And it will be a fairly substantial sum.

You bought the property back in 1988 for IR£28,000. Back then, you were allowed to apply a “multiplier” to the purchase price to reflect the debilitating impact of inflation on the value of your investment. This practice stopped in 2002 but anyone who bought prior to that could still use this indexation to reduce any subsequent capital gains tax bill.

As you are only transferring ownership of the property now, you can still avail of this relief. Depending on when you bought in 1988 (essentially before or after the start of April as the tax year back then started in early April), the £28,000 purchase price would have been indexed up to either £43,484 if you bought after early April, or £44,324 if earlier in the year.

Of course, we’ve moved to euro since then so you’ll need to convert these punt sums into euro. The easiest way of doing that is to divide the punt figure by 0.787564. In this case, that gives you a figure of either €55,213 or €56,279.

This is your base figure. You say the property is now worth €200,000. On that basis, your gain is either €144,787 or €143,721.

It's important to remember that even though you only rented out the property for a few years, it was always considered an investment – and thus subject to capital gains – because you never lived in it as your principal private residence, or family home, which would have exempted it from tax for that time.

Periods spent using it as a holiday home do not make it a family home. You will have had a family home at that time and, for Revenue’s purposes, you can only have one of them at any one time.

But what about this €20,000 you spent doing work on the property back in 2011?

Such sums are irrelevant for capital gains purposes although you should have been able to claim them against rental income if the property was rented at that time, or being prepared for rent.

Unfortunately, it is now too late to claim relief on expenditure dating that far back – Revenue only allows you go back four years for such claims.

But there are some things that you can set against your capital gain. First among these are costs incurred in buying or selling the asset. The selling side doesn’t affect you obviously as you are giving it to your son and his family but you can claim for legal costs you paid back when you bought the cottage.

When all that is deducted, you are then exempt from tax on the first €1,270 of any gain you make in a given tax year.

So, assuming the net gain on your cottage is €140,000, the €1,270 exemption brings that down to €138,730 and you will pay tax on this at 33 per cent – or a sum of €45,781.

As I said, it is a significant sum. So what can you do about it? Well, if you hold on to the asset until you die, any capital gain also dies with you which means no tax bill for you or for your estate.

However, that might present issues for your son and his family. Revenue has tightened rules on parent financial support for adult children so the assumption would be that your son would be paying annual rent on the property while living there.

It might also make it more difficult for him to raise money to extend the property if his name is not on the deeds.

Assuming you do transfer it to him, it will count against the lifetime limit he can inherit form you. This is currently €335,000 so it does still leave him with "headroom" of €135,000 in inheritances from you or his father, if any, before he becomes liable to inheritance tax.

In my view, this is an area that people can become unnecessarily caught up in. Whether your son inherits this property now as a gift or as a bequest when you die is irrelevant to his inheritance tax position. And if he is coming home from abroad with his family now, this is the time when his need is greater.

So, as long as you can afford to pay the €46,000 odd in capital gains tax, and are happy to do so, then it is probably more clean-cut to do so at this stage than to enter a convoluted “rental” arrangement with your son.

[ dcoyle@irishtimes.com ]