Q&A: Do I pay capital gains tax on ‘gifted’ home?

I am 33 years of age, single and have returned home to family home three years ago after 15 years of paying rent in Dublin. My father passed away almost 15 years ago now. My mother is almost 70 and retiring this year. She lives in family home that is too big for her to manage, hence me moving home.

My mother, my sister and myself sat down recently to discuss the future and we don't want to sell family home so we decided that my mother would "gift" the family home to me. I would take out a small mortgage and renovate the home to incorporate a separate living area for my mother – essentially a granny flat within the house.

The house is worth about €300,000 but we will have to get valuer to see for sure. I have never owned a house before and have received no inheritance in the past five years.

Will I have to pay capital gains tax or stamp duty on property? Or are there other taxes or charges I’m not considering?

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My mother has gone to her solicitor recently and I’m due to see him in a couple of weeks, but I think he can’t represent us both so I will have to organise my own solicitor.

I have read up about CAT and stamp duty but some of the jargon confuses me.

Ms T.M., Dublin

I am a little puzzled by the timing of your family’s move to gift the family home to you, but I can clarify one thing for you straight away. There will be no stamp duty or capital gains tax on the sort of arrangement you and your mum are considering.

I can see the sense of your mum looking to provide for you, with what seems the generous agreement of your sister, given that she is struggling to manage the property, and your decision to return home to help her out.

However, this route does leave you with the prospect of a tax bill – if not now, then almost certainly later.

One of the issues that specifically concerns me is your comment that you have not received any inheritance in the past five years. There is no five-year threshold on inheritance and/or gift aggregation in Ireland. You are obliged to take into account all gifts (over the value of €3,000) and inheritances received since December 5th, 1991 – 26 years ago.

As inheritance is grouped into three categories – in simple terms: from parents; from other close relatives; and from anyone else – the principal issue here is any inheritance you may have received from your father. You mention he died 15 years ago but that is still well within the time period for aggregation.

As of this year, you are allowed to receive a total of €310,000 from your parents by way of large gifts and inheritances. Your mum’s home is, you say, worth €300,000. That is already close to the limit and you say you have yet to get it valued. In a rising property market, it could already be at or over the €310,000 threshold leaving you with a tax bill.

Over the limit

If you received any substantial inheritance from your father, the gifting of the home will inevitably put you over the limit, again facing an immediate tax liability. Gift or inheritance tax, or capital acquisitions tax (CAT), to give it its formal name, is levied at 33 per cent.

That could make things tight for you financially, especially as you are also talking about taking out a small mortgage to reorganise the house structurally to allow dedicated space for both your mum and yourself.

And, even if you received little or no direct inheritance from your dad, this gift will almost certainly see you facing an inheritance tax bill at some later point when your mum dies if you inherit anything further from her at that time – unless, of course, the tax-free threshold rises sharply from the €310,000 over that period.

The most important piece of the puzzle, from my perspective, is that you appear to be deliberately precluding the use of the very tax advantageous dwelling home exemption.

Dwelling home exemption is among the most generous tax reliefs available and was designed specifically for people in your position – those who take care of elderly parents or relatives who could find themselves functionally homeless by having to pay inheritance tax on what is effectively their home when that older person dies.

Under the terms of the exemption, anyone who has no financial interest in any other property and who lives for three years before inheriting a property owned by the benefactor does not have to take any account of the value of the property for inheritance tax purposes as long as it was the only or main home of the person who has given it to you and that you continue to live there for six years after inheriting.

Tax-free

The bottom line is that you could receive the house tax-free under the exemption and still retain your full Category A CAT threshold of €310,000 to cover any other assets inherited from your mother or father.

The exemption applies, with very minor specific exceptions, only to inheritances. Parents used to be able to gift their homes to relatives and still avoid tax but that was being abused by a number of wealthy people and the loophole was closed.

By taking the property now as a gift, you are leaving yourself open to tax that you would avoid perfectly legally if you and your mum waited for your to receive the property by way of inheritance.

There is nothing that I can see to stop your mum rewriting her will to reflect these wishes – especially as your sister appears to have no objection. And there is no reason that you cannot still reorganise the property to create a granny flat.

I would expect any solicitor worth their salt to outline the issues above to you - and, yes, I would consult a separate solicitor. They could even be in the same practice though, as a fan of clear blue water in matters legal, I’d suggest you should ideally seek advice from a separate firm.

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