With property values low, now could be the right time to pass on properties to the next generation, writes JACK FAGAN
WITH REAL estate values at their lowest for many years, now is probably a good time to look at the option of transferring properties on to the next generation. As always, liquidity is central to this exercise so it is necessary to review the tax implications and decide whether this is an opportune time to hand over scarce cash to Revenue.
Either way, property inheritance is set to become an important plank in the taxation system in the years ahead because of the phenomenal growth in the number of second homes and buy-to-let properties.
Most of this buying spree happened in the past 15 years and though there are no official figures available, conservative estimates put the number of second properties at well over 300,000.
And that does not take into account the huge number of overseas holiday homes bought in the boom years. As everyone knows, the Irish are big players in the Spanish market. They also own a surprising number of properties throughout France and Portugal as well as on the other side of the Atlantic, particularly Florida.
Unfortunately, many of those who chose Dubai and Bulgaria would happily walk away from these investments, now that they are only worth a fraction of the original cost.
Most properties tend to be passed on through a will but there are obvious advantages in taking action now that values are on the floor. As with all voluntary disposals of property, it is necessary to review the tax implications of passing it on.
The Revenue has three means of limiting the flow of wealth from one generation to the next – stamp duty, capital gains tax and inheritance/gift tax.
Stamp duty is payable at 7 per cent on the overall value of residential property being transferred above the first €125,000. A 6 per cent rate applies where it is other than residential property valued in excess of €80,000.
With the fall in all values by between 40 and 50 per cent since 2007, there will be a corresponding reduction in the level of stamp duty.
Those transferring property to relatives such as children, nephews and nieces can also avail of a 50 per cent discount in the level of stamp duties, effectively bringing it down to 3.5 per cent for residential property and 3 per cent for other properties.
Capital gains tax (CGT) is payable at at a rate of 25 per cent on the increase in value between the time of purchase and the date of disposal. Allowances are made for inflation. An owner giving a gift of property – whether a home or a commercial investment – is for CGT purposes deemed to have disposed of it at open market value and is taxed accordingly.
The fact that it is being passed on to a son or daughter does not change anything. A principal private residence is exempt from this tax.
With property prices now thought to be close to bottoming out, tax advisers would contend that now is an opportune time to transfer these assets and minimise the liability for CGT.
Gift tax or inheritance tax is payable by anyone receiving a gift or inheritance at the rate of 25 per cent on the overall value after a tax-free allowance is taken into account.
This is currently €414,799 on inheritances from parents (down from €542,544 in the previous year), €41,481 from close relatives and only €20,740 for all others.
The allowances can be availed of at various stages or in a single transfer of property assets but, once the threshold is reached, there is no room for further manoeuvre.
A little known exception to the rule provides a way of passing on ownership of a house without paying inheritance tax.
The beneficiary must have resided in the house for three years prior to the inheritance and not had a beneficial interest in any other dwelling at the time. They must also continue to live in the house for a further six years – unless they are over 55 years of age – to avoid any claw-back.
This is also available in a more limited form for gifts, provided the donor is over 65 or infirm and the beneficiary was caring for him or her.
Property expert Anthony Murphy of Trim solicitors Regan McEntee Partners advises that every proposed transfer of assets needs to be examined on its individual merits as in no two cases are the tax merits or pitfalls the same.
“However, it is a good time for anyone with investment property to take expert advice and examine whether it would be opportune to consider passing on some of their assets at this stage with values at a presumed all time low.”
Mr Murphy says that clearly a number of other considerations will come into play and anyone proposing to dispose of assets should first ensure that they have adequate funds to meet their own needs and those of any dependants. “We would always advise people against diminishing their assets for tax purposes without first ensuring that adequate provision has been made for their financial independence for the remainder of their life and the financial security of any dependants.”
He said the term wealth management does not only relate to owners of substantial assets.
Even in today’s depressed property market, the average family home was of considerable value “and we would always advise our clients to carry out a regular review and update their wills and consider the most appropriate time and the most cost-effective way for passing on assets”.
None of this should be confused with a recently published will in the US where a wealthy businessman had a thoughtful message for his son.
His will said: “To my son I leave the pleasure of earning a living. For 27 years he thought that the pleasure was mine, but he was mistaken.”
