My late mother-in-law bought an apartment 25 years ago and lived in it until her death. It was rented to various tenants for over 25 years and the last tenants left in August 2020. We really don't want to rent it again.
Our eldest child was renting and paying €700 a month for a small bedroom in a shared house. We decided to upgrade the very dated apartment and allow our daughter to move in.
The query is, can we let her stay there rent-free and how does this affect inheritance tax. Is the rent she should be paying, which would be €1,000 a month, considered as part of her inheritance allowance? How does Revenue view young adults living rent-free in parents’ accommodation?
Also the apartment was bought by my mother-in-law for about €35,000 and it is now worth about €335,000. If we were to sell it now, how much capital gains tax would we have to pay?
Ms MM, email
Okay, two issues here: First your daughter staying rent-free in the apartment that you, her parents, own, and second the issue of a capital gain if you decide to sell.
I’m slightly confused on the second one as your mother-in-law appears to have both rented it and lived there at the same time, so let’s get the first part of your question out of the way as it is crystal clear. Revenue will not be persuaded that your daughter is entitled to live there rent-free if she is not in full-time education or is over the age of 25. They’re quite black and white about that.
If you are providing her with a home rent-free, the market rent for the property is considered a gift.
The first €3,000 a year from each of you and her father (assuming you are both joint owners of this property) is not taxed as it is covered by the small gift exemption. The balance will be set against her lifetime capital acquisitions tax (inheritance tax) threshold.
You say the market rent for the apartment is €1,000 a month. On that basis, she would be paying €12,000 a year. If both of you own the apartment, €6,000 of that can be covered by the small gift exemption each year with the other €6,000 being marked against her €335,000 lifetime limit of gifts and inheritances from you.
Revenue can challenge the “market rent” figure so be sure of this and also be aware that it will be expected to rise annually.
Loophole
There was more latitude on this up to 2014 but then Revenue discovered that the Irish love of a loophole had seen a significant number of well-off families use the measures then in place to more or less fully finance the lifestyle of their adult children.
The 2014 Finance Act tightened the rules and now the only support parents are allowed offer adult children tax-free is the option of living in the family home, funding a child's wedding costs (but not the honeymoon) and providing accommodation away from home rent-free to a child under the age of 25 in recognised full-time education.
Everything else is seen as a taxable gift and will reduce her inheritance tax threshold.
It may well be worth it to your daughter if she can use the financial space to build up a deposit (you say she had been paying €700 rent elsewhere so she clearly has capacity to either pay rent or save). The “gift” of free rent could be more useful to her now than an inheritance down the line.
Capital gains
On the capital gains issue, you mention that your mother-in-law paid €35,000 – or its punt equivalent – to purchase the apartment 25 years ago, but the key issue is its value when she died.
Capital gains die with an owner so any gain up to her death for any time she rented it out is immaterial. What you need to ascertain is its market value when it passed to you and your husband. That will be the base cost and subtracting that from the price achieved in any sale – €335,000 or whatever – minus allowable expenses such as legal and estate agent costs will give you the amount liable to capital gains tax at 33 per cent.
Please 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. No personal correspondence will be entered into
