Q&A: Q Does an annual gift of €3,000 accumulate as part of the allowable €43,000 from each parent to a child? Mr T.A., e-mail
AThere are a couple things to note here. First, the current threshold for gifts/inheritances between parents and children is €434,000, not €43,000. As previously noted this is a cumulative threshold.
The €43,000 – or €43,400 to be more precise – is the threshold for gifts and/or inheritances between linear relatives (to siblings, grandchildren, nephews/nieces, cousins etc).
That means gifts and inheritances received from either parent over the course of the child’s life are all taken into account in assessing whether the threshold has been exceeded.
However, the point you raise about the €3,000 is relevant here. The first €3,000 of any gift from any individual to any other person in a calendar year is not taken into account when assessing capital acquisitions tax.
You could give €3,000 to each of your children, grandchildren, or even neighbours each year and it would have no CAT implications.
If you were to give €5,000 a year to your children, only €2,000 of this would be taken into account under the cumulative provisions applying on the gift tax thresholds.
Q I have an apartment on which I owe approximately €180,000 which is let out at present though not quite self-financing. However, I am wondering should I use some of the rent money to either pay off a lump sum against my mortgage which is currently at 3.86 per cent or should I use it for an AVC as I am 36 years old and my pension is currently only worth about €10,000.
I am paying my tax at the lower rate now as I recently got a pay cut. Also, could you let me know please how I would calculate the income tax I have to pay on my rental.
Mr C.G., Dublin
AAs a general rule, a person should pay off their debts before looking at the savings side of the equation. However, the long-term nature of pension investment can sometimes muddy the waters in decision-making.
You are paying tax at the lower rate which means that you will benefit from tax relief only at that level on any contributions to your pension.
You should also bear in mind that, while people are constantly urged to start pension savings early, you are only 36 and already have some private pension cover.
On the other hand, the rent is not covering the cost of the apartment at present and that situation is only likely to worsen in the short term as rents continue to drift.
You don’t state what type of mortgage you hold but, unless it is a tracker mortgage, the likelihood is that it will rise sooner rather than later as banks look to bolster their margins on lending. Already Permanent TSB has moved to increase variable mortgage rates.
You also do not say how long your mortgage has to run – although the fact that you are unclear about your tax liabilities as a landlord indicates it might be some time.
However, you should remember that interest rates are very much at the bottom of the cycle currently. A further cut is possible but the signals from the European Central Bank seem to indicate that it would prefer not to further lower rates.
That being the case, rates will, at some point, rise, hitting even those on tracker mortgages. Given the current low level of rates, that impact on those borrowers whose finances are already stretched could be acute.
The other option – putting money away somewhere where it would be accessible at short notice in case of financial distress – really depends on the interest rates available. From what I can see, you might be better to increase payments on your mortgage, or make a lump sum contribution, but make sure that you do not find yourself locked into these higher contributions going forward.
On your tax liabilities, income earned from property rental is taxed in the same way as any other income you earn during the year – and may, in itself, be sufficient to push you back up into the higher tax bracket if you are close enough to it.
There are certain items that are allowable against the rent before assessing tax. These include fees incurred in advertising the property and agency commissions. Money spent in management fees, insurance and maintenance are also allowable as are a capital allowance of 12.5 per cent of the cost incurred on fixtures and fittings for the apartment.
In addition, when you sell the apartment, which is considered an investment property by the Revenue, you will face a capital gains tax bill on the profit you make on the deal.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to dcoyle@irishtimes.com
This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
