Good Samaritan gets a fright with Revenue’s letter

I bought a property, to help a struggling relative, a couple of years ago but when that didn't work out I allowed a nephew to live in it rent free, while he saved to buy a house.

Now, Revenue wants to know what I’m doing with it. I’m just a PAYE worker who has always been tax compliant but I didn’t know that this arrangement would get me in to trouble. Any advice please?

Ms B.C., email

So much for good Samaritans. Your relatives have clearly had the good luck to run into someone who has a big heart but it could cause problems for them, if not for you.

How does my brother assess tax on a right of residence?

---

What tax must I pay on share options from employer?

---

Giving to charity: making your money go farther

---

Will informal separation mean husband still owns part of our home?

---

It is always unnerving for people when they are contacted by the Revenue Commissioners, even more so for people like you who are PAYE taxpayers and therefore have little, if any, direct contact with the tax authorities. The automatic assumption is that you must have done something wrong.

Not necessarily so. What Revenue hates is loose ends. Through local property tax records they will know that you have your home. If you are paying the local property tax for this other property, as I assume you are, given what you say about tax compliance, then it is easy for them to sort out that you have two properties. And of course they would have other paperwork relating to you, such as stamp duty payments on the second house, etc.

The obvious issue from Revenue’s point of view is that you cannot live in two houses. And equally they will assume that no logical person will have bought a property just to leave it derelict.

Of course, it is not unheard of. After all, a substantial number of people do own a holiday property as well as their own family home. And there is nothing improper about that. But it wouldn’t necessarily stop Revenue from checking to confirm.

But if this property is close to your own home or somewhere that is definitely off the holiday trail, the suspicion they might have is that you are renting it out and not declaring tax on the income. Their other concern, especially now when the issue is relatively high profile, might be that you are using the property for short holiday rents via platforms such as Airbnb.

I suspect this is the purpose of the enquiry. But, from what I understand, you don’t have any income as you’re not charging any, so you have no tax liability to worry about.

However, the same cannot necessarily be said for your relative and, more recently, your nephew. There are increasingly strict rules about adults getting tax free financial support from family. Essentially they are expected to stand on their own two feet as long as they are over the age of 18 – or 25 if they remain in full-time education until that age. The only real exception is where they are “permanently incapacitated by reason of physical or mental infirmity” from maintaining themselves.

By allowing your nephew – and before him, your other relative – to stay rent free in this second home, you are effectively gifting them the market rent of the property each month.

That doesn’t necessarily mean he has a tax bill looming, but he might.

Now, there is nothing to stop you gifting this young man €3,000 under the small gift exemption but that is only once a year. That aside, what he should be paying in market rent for the property is set against his lifetime capital acquisitions tax (CAT) threshold. CAT is also known as inheritance tax or gift tax.

As your nephew, he falls under Category B in relation to gifts and/or inheritances form you. And the threshold under category B is €32,500. This is a lifetime limit for him from you and from any other “linear relative” other than his parents. So it would include gifts or inheritances from any other aunt or uncle, a grandparent, or any sibling.

Assuming he has received nothing from any of these, he can stay rent free in your property only until the rent he would have paid tops €32,500 plus the amount covered by any small gift exemption.

You don't say where in the State this is but, for example, a one-bed house in Tipperary would run to between €700 and €850 to judge by daft.ie, and a two-bed around €1,000.

On that basis, if this were a one-bed house in that part of the State, he might be able to stay there for four or five years without having a tax liability. Up in Dublin, or in Cork or Galway, the window would be smaller as rents are higher.

Once the outstanding market rent he should be paying exceeds €32,500 (plus anything he could be deemed to have received from you under the small gift exemption), he would be building up a tax liability to the State of 33 per cent of any additional market rent. That would need to be declared and paid annually with an IT38 form.

Indeed, even before tax is owing, he has to let Revenue know when his “gift” exceeds 80 per cent of the threshold – or €26,000 in this case – probably just so they can keep track of him.

The bottom line here is that you need to inform Revenue that you do have this home but that you are earning no rent from it. They will inevitably want to know why that is, at which point you’d be obliged to let them know your nephew is staying there.

And from his point of view, it might be a good deal. He may pay tax on a future inheritance but, as he is saving up to buy a home, now is a time when the financial helping hand may be of most benefit.