My daughter has, with her husband, owned her own home for some years. If we, her parents, buy a rental property that is half in her name, but she does not take any of the rental income, what is her tax liability? We are doing this as an advance on inheritance, if it is a good idea.
We will take the rental income as a pension for ourselves.
Ms AL
Smart families plan, but it certainly pays to check whether something that seems like a good idea does not carry any hidden perils.
Your daughter and her husband already have their home, so this is not the parental helping hand that assists so many younger people in getting their first home. As such, it will not benefit from the tax exemptions granted to a principal private residence, or family home, when they eventually sell it.
But that certainly does not mean that it is a bad idea.
Your plan is two-pronged. One, you are looking for something that will deliver an income stream in your retirement, but you are also in the fortunate position of being able to fund a significant advance on your daughter’s inheritance.
As of now, she can receive assets with a value of up to €400,000 before she becomes liable for tax. That covers all inheritances from either parent and also any gift worth more than €3,000 that she receives in any tax year.
The threshold can rise (or fall, as it has done in the past) but, for tax purposes, it is set in stone at the point at which the inheritance or gift is received. So, if she were to get an inheritance worth, for argument’s sake, €420,000 now, she would be liable to tax on €20,000 of that at 33 per cent.
If the threshold were to rise to €500,000 in the future, she would have more scope going forward, but would not be entitled to any refund for tax already paid at the current rate. Similarly, if the threshold fell, she would not be liable for any further tax on the inheritance. It is assessed purely against the threshold in place at the time.
The main reason for gifting your daughter this property – say it’s an apartment – half share now rather than later is the expectation that property values will rise over time. Assuming that is so, the half share in the apartment will consume a far greater proportion of her tax-free threshold as an inheritance when you die than as a gift now – for the same asset.
Given that you are looking at sourcing pension income, I’ll assume you are nearing retirement. On the basis of current longevity, you could expect to live at least another 15 years and possibly many more.
If the half share of the apartment is worth €200,000 now and apartment prices rise by around 5 per cent annually over that period, her portion of the apartment would be worth close to €416,000 in 15 years’ time – a figure that would more than consume the current tax-free threshold.
Figures published by the Central Statistics Office last week show prices are rising by, on average, 7.8 per cent, with apartment prices increasing by a more modest 6.6 per cent. At that figure, the €200,000 half share now would be worth over €521,000 in 15 years’ time.
So it makes a lot of sense to gift her the apartment now rather than wait, given you can afford to do so without putting yourself in a difficult financial position. It is basic tax planning.
It doesn’t mean she will dodge inheritance tax altogether. She may well inherit the other half of this apartment and/or other assets when you die, but at least her tax bill will be more modest than it might otherwise have been and her options for dealing with it wider.
Clearly, being a property owner does come with responsibilities – including the cost of ongoing bills for utilities, insurance, repair and maintenance etc. As an owner, she may well also have to register with the Residential Tenancies Board.
Revenue will need to be satisfied that all tax due on any rent is paid. If you fail to pay for any reason, the tax authorities will be able to hold all owners liable jointly and severally for any money owing, together with interest and penalties.
Landlords are required to file an annual return to Revenue so it would be worth checking with your local tax office whether your daughter would be held to this requirement, given that she will effectively be the silent partner outside this commercial arrangement.
For this reason, you should also make sure there is a clear (written) agreement covering the fact that all rental income is coming to you and who is responsible for the cost of securing tenants or dealing with any legal or other enforcement costs in relation to tenancies. I would suggest this is done through a solicitor so that, hopefully, there is no room for misunderstanding.
No one wants to foresee trouble with an investment in a rental property – especially one that is intended as a gift to one of the owners – but it is much better to look ahead and be prepared than to be blindsided.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email todominic.coyle@irishtimes.com, with a contact phone number. This column is a reader service and is not intended to replace professional advice