My father gifted sites to me and my siblings in April 2011 (1.3 acres to myself and 0.8 acre each to my two brothers). What would the capital gains tax implications be if we sold the sites (assuming the buyers obtain planning permission)?
SR
Gifting sites to children is fairly common in Ireland – at least for those with access to land – and, in the middle of a housing crisis, it is certainly a tax-efficient way for the Bank of Mum and Dad to offer a helping hand to children looking to have their own home.
It can certainly make sense financially for both parties, but, crucially, only if those sites are used by the children to build a principal private residence – ie, a home they will use as their family home, rather than as a holiday home or an investment property.
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That hasn’t happened here, and that could leave you and your brothers with a fairly substantial tax bill, if it hasn’t done so already.
Original gift
Firstly, we need to step back to 2011 and understand what your father’s intention was.
In general, the sale or transfer of assets from one person to another (other than a spouse) creates a position where the seller (or donor for a gift) has to assess whether they have a capital gains tax liability.
The original purchase price – or its value at the time of inheritance if that is how your father came into the land – is deducted from the market value at the time it is sold or gifted. You can deduct expenses incurred directly in the purchase/inheritance and sale/gifting, such as legal or estate agency fees, but not much else.
If your father owned the land before 2003, an indexation factor would come into play, increasing the purchase price/inheritance valuation, which would reduce any capital gain.
However, there are certain important exceptions to these rules. One of these regards the gifting of sites of certain size and value to children for the purpose of those children building a home on them.
The key legislation here is the Taxes Consolidation Act of 1997, specifically section 603A, which covers disposal of a site to a child.
The limits are that the site must be no more than one acre in size and worth no more than €500,000. This exception is academic in your case, as your site is too big – but it might be relevant to your brothers.
Under section 603A, your father would not have been liable for capital gains tax on those sites as long as they were used to build a “principal private residence” – a family home.
Some financial advisers will encourage parents to pass on any land only under their will, and not while they are alive. The reason for this is that capital gains die with the person
So while your father would have been liable to capital gains tax on the site he gave you, as it was too big for the exemption, he may well not have paid tax on the sites given to your brothers.
Sale of sites
Now we move forward to the current position. Each of you is considering selling your sites for development, with the onus of planning permission falling to any buyers.
There are no houses involved, so there is no prospect of any of you claiming exemption on the back of it being the sale of your principal private residence – even before you consider the issue of development potential.
That means you will all have a capital gains tax bill on the difference in the price at which you sell each of these sites and their value back in 2011, when your father gave them to each of you.
Again, you can deduct costs directly involved in their sale, but nothing else.
However, your brothers could face a further unwelcome tax charge. The exemption under section 603A applies only where a family home is built on the site and the person who was given the site lives in that home for at least three years.
Clearly that did not happen here.
The potential headache for your brothers is not only are they liable for capital gains tax due for the time they owned their sites, but each of them would also be liable for any capital gains tax your father did not pay by virtue of availing of the section 603A exemption.
That dates back to when your father first took ownership of the site and could involve a significant bill, given the difference in value between then and now and the 33 per cent tax rate involved.
For sure, they are entitled to a capital gains tax exemption on the first €1,270 of any gain, but that is peanuts in a case like this.
This is why some financial advisers will encourage parents to pass on any land only under their will, and not while they are alive. The reason for this is that capital gains die with the person, and so there would be no question of the beneficiaries of a site like this finding themselves liable for another person’s tax bill years down the line.
Of course, if your father did pay capital gains at the time of the transfer of the sites, the issue is moot, and your brothers only have to worry about the increase in value over the past 15 years.
Your father would, in any case, have been obliged to file a return detailing the disposal and also the relief he was claiming, if indeed he was. So Revenue will certainly be able to check back on what did or did not happen.
In your case, your liability is only for the past 15 years, regardless. As the site is more than one acre, it was never exempt under section 603A, and therefore your father was liable for capital gains tax in 2011. If he did not declare or pay it, then the liability falls back on to him, not you – or his estate, if he is no longer alive.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email todominic.coyle@irishtimes.comwith a contact phone number. This column is a reader service and is not intended to replace professional advice
