Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or 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 through the columns of the newspaper. No personal correspondence will be entered into.

Capital gains

In relation to capital gains tax, can you tell me whether there would be a liability in the following instance? A mother buys a second house for approximately £100,000. She has the intention of giving it to her daughter at a later stage. She pays the mortgage and expenses on it for two years or so. She then decides to transfer ownership of it to her daughter. However, at this stage, the house is worth about £160,000. If she does transfer the house, is she liable for capital gains on the difference of £60,000?

Could either of the following be argued?:

1) At the time of the purchase, the daughter was financially dependent (at university). Therefore, the transfer of the house can qualify for a capital gains tax exemption as a principal private residence since the occupier, to whom it is being transferred, is a dependant of the owner;

2) The intention all along was the eventual transfer of the property to the daughter. Therefore the beneficial owner of the property was always the daughter and, in substance, there is no real transfer of property taking place other than a legal amendment of title. You might say that this is an argument of the substance and reality of the transactions taking precedence over their legal form.

Mr P.M., e-mail

Well, you have certainly put some thought into this before writing to Q&A. Quite frankly, you are talking about very specific points of law and about legal definitions and the best course of action would be to consult a solicitor familiar in this area.

It appears to me quite clear that, regardless of the stated intention at the time of the purchase of the property, the mother legally bought it. In such circumstances, the property will be seen as a second property and any subsequent transfer during her lifetime would attract a liability to capital gains tax.

The fact that the daughter was dependent on the mother at the time of the purchase does not, as I see it, in any way infer that the property can be seen as a principal private residence. Similarly, while it is possible the mother always intended to transfer the property to the daughter, I cannot see any way in which this would equate with the daughter being the beneficial owner in the legal sense.

The Revenue, as I am sure you are aware, tends to see things in black and white and would need some convincing legal argument that the property was always, in reality, the daughter's. I am no solicitor, but I don't think there is such an argument.

The only circumstances in which such a transfer would be free of capital gains tax would be if it were transferred upon the death of the mother. Capital gains are considered to die with the original owner. Still, it does not sound as if this exemption will be of much use in this case.

Assuming it is liable for capital gains tax, the rate of taxation is 20 per cent. The first £1,000 of capital gains in any given year are free of tax. In addition, indexation means that, for the purposes of CGT, the initial £100,000 investment two years ago will be treated as being worth £103,300 in today's money. That means CGT would be liable on £55,700 - assuming the valuation of £160,000 is correct. At the rate of 20 per cent, that amounts to a CGT tax bill of £11,140.

While you are assessing the cost of any transfer, remember it raises issues outside of capital gains. If the daughter is to assume the mortgage, this will in essence be a new mortgage and eligibility will be based on a financial institution's assessment of her ability to meet the cost.

Generally a lender will not offer more than three times the applicant's income by way of a mortgage and, even then, only up to a maximum of 90 per cent of the purchase cost. Some are currently being more flexible and examining an applicant's disposable income but still . . .

You say the house cost £100,000 and is now worth around £160,000 with two years of the mortgage paid. In those two years, very little of the capital will have been paid off, even on a straightforward annuity mortgage.

Assuming you are transferring the house at its actual cost to the mother not the current valuation, the daughter would need an income of close to £30,000 to qualify for the mortgage.

Of course, if you are on a fixed rate, there may be penalties to pay to end the fixed contract before transferring any mortgage. However, it is possible that if the same lender were to advance a new mortgage to the daughter, it would assume she were seeing out the fixed period, therefore avoiding a cost to it and the need to impose a penalty. It is unlikely but, with a friendly lender and some persuasion, you never know.

If you are transferring the house with no financial cost to your daughter, it would in all likelihood be treated as a gift and come under the provisions of capital acquisitions tax (CAT). While, in itself, a £160,000 house would come within the £300,000 tax-free CAT threshold on gifts and inheritances from parents to children, it might be liable to tax if the daughter has previously received gifts and/or inheritances and would certainly be taken into account in the event of future inheritances or gifts from her parents and, as the law now stands, anyone else.