I am a 54-year-old German national and have been living and working in Ireland for the past 27 years, most of it as self-employed, paying my income tax in Ireland. I’ve always been a renter and have no property in Ireland.
Recently my retired parents (German nationals and residents) have transferred legal ownership of their investment property (an apartment) in Germany to my name, retaining the right to beneficial interest, ie tenancy for life. They receive the rental income from it whenever it is rented out.
Now, as I am looking into a career change, facing potential financial instability during the transition, they offered that I receive the rental income. As far as I know, income from property is subject to a fairly high tax rate here – 52 per cent I believe.
I’m wondering would tax apply in this case of income from a gifted property? If tax is applicable, at what rate would it be, considering my lower than usual earnings over the next year or two while I’m retraining? Could I offset it against loss of income? Would it even be worth receiving this rental income?
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Ms M.S., email
You may be German but this is a very Irish conundrum. On the surface, it might seem like an income tax issue but I expect it is more a gift tax one – and that will certainly affect the tax side of things.
If it was a simple issue of you receiving the rent on a property you owned, then it would be treated in Ireland under normal income tax rules.
That doesn’t necessarily mean that you would be paying tax “at 52 per cent”. It depends on the level of your income. In Ireland, income at up to €36,800 is taxed at 20 per cent. Anything above that is taxed at 40 per cent.
On top of that, income also attracts social insurance (PRSI) at 4 per cent and universal social charge on a sliding scale.
If this rental income was your only income, I doubt that you would be paying the higher rate tax of up to 48.5 per cent on any of it – and certainly not 52 per cent. And as the first €36,500 is taxed at 20 per cent, any tax owing would likely be comfortably under 30 per cent.
While we are dealing with the theoretical, domicile is also sometimes an issue on income abroad. While you are resident and tax resident here for a long time, it is still likely that you consider Germany your home and you clearly still have ties there. That would likely make your domicile German.
In that case, you would not pay tax on rent of a property you owned as long as you didn’t bring it into the country. Of course, in this case, the issue would be somewhat academic as the whole purpose of the exercise is to fund your living costs here so it would come into Ireland and be treated as income here.
But, as I said, that is all theoretical – of interest to anyone who is getting rent from a property they own, but not really for you. Your circumstances are different.
The critical thing here is that your parents have retained a life interest in the revenue stream from this apartment. So this rent is their income and subject to German income tax law. Their decision to allow you to enjoy the benefit of this income while you are retraining is effectively them gifting you the rental income.
I’m no expert in German tax law but I suspect they may still be liable to income tax on the rent, regardless, on the basis of the life interest.
From your perspective, any gift you receive while resident here will be set against your lifetime tax-free threshold covering gifts and inheritances.
In relation to gifts, the first €3,000 per year from any person is set aside. So if both your parents share this rental income and both are therefore gifting you the income stream, that figure doubles to €6,000.
In Ireland, as in Germany, you then have tax-free thresholds on gifts determined by your relationship with the donor. The limit in Ireland for a child receiving a gift or inheritance from a parent is €335,000 though this can change from year to year. I think the figure in Germany is €400,000 though this works on a rolling 10-year basis whereas the Irish threshold is a lifetime limit.
So, below this €335,000 – after allowing for the €6,000 small gift exemption per annum between the two parents – there will be no tax due from you at all. Once you exceed this limit, you will pay capital acquisitions tax at 33 per cent.
This is a self-declared tax and the Revenue rule in Ireland is that you must notify the tax authorities when you top 80 per cent of the tax-free threshold – ie €268,000 – even though no tax is due until you top the €335,000 level.
Of course, using this tax-free threshold now on the gift of rental income from this German property means that there will be less tax-free headroom available when you eventually get control of the property – at which point you will be assessed for Capital Acquisitions Tax, which is also known as gift tax or inheritance tax.
People get very stressed about this for reasons that always puzzle me. If your need for support is now, as you retrain, then that is the best time to get the tax benefit of the gift. There’s little point in you having to struggle financially only to inherit the property later when your financial need is unlikely to be as pressing.
Normally a property gifted would leave you exposed to a charge for stamp duty. However, in this case, as the property is not in Ireland and, to the best of my knowledge, the paperwork relating to the transfer into your ownership was not carried out in Ireland, you will not have to worry about stamp duty.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
