Working out the market rent on property used by my child

In your comments on the new rules regarding gifts being subject to Capital Acquisitions Tax, you mention that providing a child with a house for free would not be allowed (by which I assume you mean that it would be subject to tax). What would be the situation if a house was rented to a child and partner for a reduced rent? Presumably, if the difference between the rent charged and the full market rent is deemed to be a gift, the €3,000 annual exemption threshold would still apply but how would “full market rent” be determined?

Mr S.D., email

Capital acquisitions tax is a self-assessed tax, which means that Revenue fundamentally relies on the honesty of the individual to correctly calculate any liability.

In relation to rent, it would be your responsibility to research rents in the area for the type of accommodation you are providing and to use this figure in working out what, if any, benefit your child and partner receive by virtue of their reduced rent.

Of course, Revenue is not so gullible as to be entirely trusting. The whole reason the rules have been tightened in recent months is that it has come to Revenue’s attention that some people have been abusing the system effectively to fully fund, or extensively fund, the lifestyle and living costs of their adult children.

If Revenue comes to the view that the figures, in this case for market rent, are out of kilter with what they believe to be the case, they are likely to question them. And if they are not satisfied with any explanation, you run the risk of becoming subject to Revenue audit – a time consuming and onerous exercise.

That’s why it is worth your while taking the time to contact local letting agents to get a reasonable estimate of the market rent for the accommodation concerned.

Do remember that there is nothing to stop you using the small gift exemption to benefit both your child and the partner. Also, it should be possible for each parent to avail of the exemption. That could bridge a significant portion of the gap between whatever reduced rent they are paying for your property and the market rent.

Even if the benefit is deemed to exceed the exemption, neither you nor your child are facing the prospect of an imminent tax liability. The excess will be set against the lifetime threshold on gifts and inheritances that your child can receive from their parents – currently €225,000. That relates to all gifts and/or inheritances received by them from either parent since December 5th, 1991 over and above the annual small gift exemption in any given year.

The issue could be more relevant for your child’s partner. If they are equally responsible for the rent, then the partner’s capital acquisition tax threshold could also be impacted. As, under CAT legislation, they are deemed to be a “stranger” in relation to you, the aggregate lifetime limit on gifts and inheritances they can receive from you and from anyone else deemed a stranger – i.e. not a parent or linear blood relative – is much lower at €15,075.

If it exceeds that, they could be looking at a tax bill of 33 per cent on anything over the threshold. Coping with shifting thresholds on CAT Can you advise me as to the obligations when a gift from a parent to a child did not reach the threshold for tax exemption at the time it was given but now does due to subsequent changes in thresholds (or at least reaches 80 per cent of the current threshold which I understand requires a declaration).

Does a declaration now have to be made (and tax paid), even though it wasn’t required at the time of the gift, or does this only need to be done if, and when, a further gift or inheritance is received?

Ms D.S., email

The bottom line is that you are not liable now for tax that was not an issue at the time you received the gift or inheritance. Take, for example, the threshold between a parent and a child.

This year, the threshold on all gift and inheritances received since December 1991 for people in this group is €225,000. But, back in early 2009, that threshold was as high as €542,544 – more than twice the current level – and the applicable tax rate on anything above that was 22 per cent, compared to 33 per cent now. It had been as low as 20 per cent not long beforehand.

So, if you had received gifts of, say €350,000 at that time, you would not have been liable to tax, nor would you have reached 80 per cent of the threshold limit – the point at which, as you note, you have to let Revenue know your position by way of filing an IT39 form even though you do not yet have a tax liability (it really just puts you on their radar).

While that threshold has now reduced to below the level of your cumulative benefit, you are not liable to tax retrospectively on the amount that is now above the current threshold. Of course, you will certainly be liable to capital acquisitions tax (CAT) on any future gifts or inheritances given you would already be above the threshold.

On notifying Revenue about the 80 per cent threshold, where this limit has been reached by virtue of ministers for finance cutting the threshold, my understanding is that you need only to notify them when you next receive a gift or inheritance, though I’m sure they’d appreciate hearing earlier.

Maximising benefit of gift exemption Can each parent give €3,000 to a son and/or daughter – i.e. €6,000 each per annum.

Mr B.O’B., email

Yes. The €3,000 small gift exemption is individualised, so each parent can given that sum to each beneficiary while staying within the guidelines of the exemption.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.