Gintax answers Sunday Independent readers’ questions on tax.
Article published on 12 January 2020

SALE OF PRIOR MAIN HOME

Q: I bought a house in late 1980 for IR£29,500 (€37,450) and married in 1984. The house is in the joint names of my wife and I.

We lived in this house until late 2002 and in the period we lived there, we extended and renovated it. In 2002, I got the opportunity to buy a site and we self-built a new house - which we moved into in late 2002.

From late 2002 until 2018, we rented out the old house while continually carrying out upgrades. All taxes and charges were paid.

We are considering selling the old house now, which was recently valued at €499,000. However, the auctioneer has advised us that there would be a liability for capital gains tax (CGT) for a sum of about €145,000 on the sale. Is this correct? I've a few questions arising from this.

First: Do you have any advice on how we could limit the CGT bill that would arise on the sale of our old house?

Second: What would be the position if we moved back to our old home for, say, three years and rented out our current home (that is, the home we self-built)? Would we still be liable for a massive CGT bill on the sale of the old home? Also, if we did this, would we lose the family status of our current home?

Third: We have two adult daughters who live away and we were thinking of downsizing. What would be the position if we were to pass on our current home to our children? Would they be hit with a massive tax bill? Would we face any bill if we were to pass our current home to them? Is there any way to limit the tax bill which either our daughters, or ourselves, would face on such a transfer? Our current home is valued at €600,000 and we are both retired.

John, Co Dublin

It appears the auctioneer has calculated the maximum possible amount of CGT on the sale of the old house.

In your case, as well as the purchase price, you can also deduct from the sale proceeds the costs of acquisition (such as stamp duty and legal costs), costs of disposal and, perhaps more crucially in this instance, the upgrades carried out. An important point to note is that any refurbishment must still be reflected in the property.

So, for example, no deduction would be available for the cost of adding a garage if that was subsequently demolished.

When calculating the total renovation costs which can be deducted from the taxable gain, bear in mind that costs incurred up to 2003 can be increased in line with inflation relief (also known as indexation relief). To secure any tax deduction, you should have evidence (such as receipts and invoices) of the amount of money spent.

In addition, principal private residence relief will apply. Under this, if you had lived in the property as your main home for the entire time you owned it, this relief would make any gain on the disposal of that property fully tax- exempt. However, in your case, the relief will operate by reducing the taxable gain by a fraction. This fraction is calculated as your period of occupation over the period of total ownership. Your period of occupation is 22 years and you can also include the final year of ownership as deemed occupation.

As you have owned the house for 39 years, the amount of the relief available will be 23-39ths of the gain - so you will be taxable on roughly more than half the gain. Based on the limited information supplied, and even without deducting the costs of upgrade and transaction costs which are not detailed, the tax liability would be about €51,000.

You can both claim your €1,270 annual CGT exemption to reduce the taxable gain.

Furthermore, if you or your wife have capital losses, such as on any losses made on the disposal of bank shares, then these can be used to reduce the taxable gain. Returning to the old house for three years prior to the sale of that house would slightly increase the portion of the gain that is tax-exempt and reduce the tax liability by about €4,000, if sold immediately after those three years.

This is based on the current market price and, indeed, the current tax rules - which can all change, in particular the value of the house. A change in the tax law here is not currently envisaged.

Furthermore, you will retain principal private residence relief on your current home for the 17 years in which you occupied it - but not for the three years of living in the other house.

Finally, transferring the current home now to your children should not have any significant tax impact for you. For CGT purposes, even if it is transferred as a gift, you will be deemed to have received proceeds equivalent to the market value of the property. Assuming you will have lived in the house for the full duration of ownership, any gain will qualify for a full tax exemption as a result of principal private residence relief.

You will also need to consider capital acquisitions tax (the tax paid on gifts or inheritances). In this respect, each child can receive or inherit €335,000 tax-free from their parents over their lifetime.

So, assuming your children have not received any prior such gifts, then the receipt by each of them of a gift worth €300,000 (assuming each inherits half the value of your current home) should be free from this tax.

Your daughters will have a total stamp duty liability of €6,000 - being 1pc of the market value of the property.