The transfer of property by parents to an adult child is an area that tax advisers encounter frequently and has become even more topical given the current environment. There are three Irish tax heads to navigate: for the owner Capital Gains Tax and for the beneficiary Capital Acquisitions Tax and Stamp Duty.
This article details the key aspects of each, along with an outline of the compliance obligations that parties need to be aware of.
investment property
Transferring whilst alive will also give rise to CGT and stamp duty considerations; as well as CAT
Capital Acquisitions Tax (CAT)
Broadly the same CAT rules apply irrespective of whether the transfer of property is made via gift or inheritance.
The CAT rate is 33% and this applies to value received above certain tax-free thresholds. For transfers from parents to a child (Group A category), the threshold is currently €335,000. These rates are in contrast with the levels at the outset of 2009 when the Group A threshold was €542,544 and a CAT rate of 20% applied. Today the inheritance of a family home valued at €500,000 would trigger a CAT liability of circa €54,450 for the beneficiary.
Reliefs available
Dwelling House
The beneficiary may qualify for an “all or nothing” CAT relief known as Dwelling House Exemption. As a result of changes in 2016, the application of this relief is somewhat limited, and it generally only applies to inheritances. However, it can operate to exempt co-habitants or adult children living with their parents on inheritance of the family home. In brief, there are four main conditions:
The house must have been occupied as the only or main residence of the owner at the date of their death. Helpfully, a person is deemed to occupy the property where they do not live there due to mental of physical infirmity.
The recipient needs to have lived in the house for three years up to date of inheritance.
The recipient can not have an interest in any other residential property. Such an interest would include foreign property or other property inherited from the same person.
The house must continue to be the beneficiary’s home for a minimum of 6 years after the inheritance (subject to limited exceptions).
Where the beneficiary is a “dependant relative” then the Dwelling House Exemption can apply to a gift. A dependant relative is defined as a relative who is either permanently incapacitated or 65 years or over. Notably this relief does not require the property to have been the owner’s residence.
Agricultural Relief
Where a farmhouse is transferred then Agricultural Relief may be available; this operates to reduce the taxable value of the asset by 90%, so essentially a farmhouse worth €500,000 would be reduced to €50,000 for the purposes of the CAT computation. To qualify, the farmhouse (or mansion house) must be transferred along with farmland and it must be “of a character appropriate to the property”. Further conditions apply, including satisfaction of a “farmer” test for the beneficiary.
Compliance requirements
The CAT “tax year” ends on 31 August with the formal deadline for filing the tax return (Form IT38) and payment being 31 October. However, an extension is available for online filings and payments. For the year ended 31 August 2022, the extended deadline is Wednesday 16 November 2022. For late payments, an interest rate of 0.0219% applies (circa 8% annually).
This can result in a very short timeframe to deal with tax matters and organise payment, especially in the context of a bereavement. This can often be an aspect not within the control of the beneficiary – for example, in a joint ownership situation, the date of death would automatically trigger the tax point. In such circumstances, a person’s death in August could result in a beneficiary having only three months to determine the tax analysis, submit the return and pay the tax.
The recipient of property may opt to pay their CAT in monthly instalments of up to 5 years; however, the default interest rate of 0.0219% daily will continue to apply. A reduced rate of instalment interest of 0.0164% (circa 6% annually) applies where the asset is regarded as agricultural or business property, so this could potentially apply to farmhouses.
Finally, it is worth noting that CAT law contains a provision for certain alleviation on “hardship” cases which are at the discretion of Revenue. The Revenue manual currently gives the only example of “common law spouses” in this context which by default would have the Group C tax free threshold of €16,250.
Capital Gains Tax (CGT)
Capital Gains Tax (CGT) will need consideration for the owner on any lifetime transfers.
For any gift or under value transfer of property, the owner is deemed to have received market value proceeds. This can trigger a gain which would be taxable at the CGT rate of 33%.
This tax would not arise if the property was transferred via inheritance, as no CGT arises on death. As a result, many owners decide to hold on to property, unless a relief would be available. Thus broadly, the following should be considered:
The main CGT relief is for the disposal of a person’s Principial Private Residence. This can operate to fully exempt the disposal of a person’s main home from tax. The exemption can be limited where the property was not occupied throughout by the owner, though there are exceptions here.
For self-build scenarios, then the CGT exemption for disposal of “Site to Child” could be relevant. This applies where land with a value of up to €500,000 is transferred to a child to enable them to construct their main residence.
Gains on disposal of property or land acquired in the period from 7 December 2011 to the end of 2014 can also qualify for CGT relief; with exemption appliable by reference to seven years of ownership.
Even in circumstances where there is a CGT liability on transfer of property, then “same event” credit may be available for the beneficiary. This operates to reduce their CAT liability by the amount of CGT paid by the owner - provided they retain the property for two years. Where a child’s CAT threshold has previously been utilised, this particular relief can be very effective.
Compliance requirements
CGT is assessed on the calendar year basis with two payment deadlines – for disposals up to 30 November then the deadline is 15 December and for December disposals the deadline is 31 January. As with CAT, the tax return deadline also has a 31 October default, with an extension available for online filings and payments. For the 2021 tax year the extended deadline is Wednesday 16 November 2022.
Stamp duty
An inheritance does not give rise to a stamp duty liability. However, the gift, or indeed transfer at undervalue, of Irish property will give rise to stamp duty based on market value of the property. The rate for residential property is 1% for first €1m of value and 2% above this.
Summary
As we enter into Budget 2023 submission season [Note], the focus is on the tax free CAT thresholds, in particular for Group A (parents to child). These ha[ve not changed since October 2019 and have not kept up with inflation in the interim. Any change here will be a policy matter for Government.
From a compliance perspective, the gift of property to a child is complicated. Indeed the Revenue’s submission to the Commission on Taxation and Welfare in January notes that such a gift would require five separate filings by the family. Along with the returns noted above, they also reference the filings required for Local Property Tax and Property Registration. In an example headed “Making tax Easy to Comprehend & Comply” they suggest a future scenario where only two filings would be required. This would surely be a welcome development for both taxpayers and their advisers.
Note - article published July 2022 (Tax.point magazine) - which contains full references, citations
