I read recently about a case where a family bought an apartment close to UCD so that their son would have a place to stay while he completed a postgraduate course with a view to renting it thereafter. Six years on, the son is still there.
They were advised that the son could have a gift tax issue as he is living there rent free. How can Revenue police this?
On another matter, are there any regulations to cover a son gifting money to a father to buy a property?
Mr M.B.
The advice you came across was absolutely correct ... up to a point.
The rules on the financial support parents can give to their adult children were tightened up in 2014 because certain wealthy families were abusing them to substantially or fully fund the lifestyles of their adult children in a very tax-efficient manner. Houses, cars and luxury holidays were routinely being funded by some people and Revenue, unsurprisingly, decided this was simple tax avoidance.
So giving the son rent-free access to an apartment does certainly expose him to assessment for capital acquisitions tax. However, there is an exemption covering part of his residence in the apartment.
Section 82 of the Capital Acquisitions Tax Consolidated Act 2003 – which covers this area – as amended by the 2014 Finance Act, states that “money or money’s worth given by an individual during his or her lifetime for the support, maintenance or education of his or her children ...” is exempt from consideration as long as the child is a minor (ie, under 18), between 18 and 25 but in full-time education or “incapacitated by reason of physical or mental infirmity from maintaining” themselves.
So this couple providing a place for their son to stay while he was studying for this course is going to be covered by the exemption.
But he is assessable for the four years since he stopped studying. And yes, the liability is the rent that the couple might ordinarily expect to get in that location.
As it is the son who is liable, he will need to check with local estate agents what the rent was in that part of the city on the type of apartment he was staying in at the time he stopped studying. It will be in a rent pressure zone so Revenue will assume the rent was increased in line with the limits available.
To complicate matters, the rules have changed in this regard. Up to July 2021 rent in rent pressure zones could rise by 4 per cent annually. From that point, the rate of increase was capped at the lower of the consumer price index or 2 per cent.
After the pandemic slowdown when inflation was actually running in negative territory, it edged above 2 per cent that month and has stayed there since, according to the CSO data, so the 2 per cent figure will suffice for his calculations from that point.
From what you say, the son started staying in this apartment sometime in 2018, so his permitted rent-free period would run up to the end of summer 2020.
According to the Daft rental report for the third quarter of that year, the average rent for a one-bed apartment in the part of Dublin he was staying was €1,890 a month, rising to about €2,200 for a two-bedroom place. Those are averages: he will still need to identify rent levels in his development.
But, for the sake of illustration, let’s go with those figures. By the time the rent reviews came due, the new lower caps had probably kicked in, so he is looking at 2 per cent annually. That brings the one-bed to €1,928 from the 2021 rent review, €1,966 in 2022, €2,006 in 2023 and, from this 2024 rent review, €2,046. If it is a two-bed, those figures are closer to €2,244 (2021), €2,289 (2022), €2,335 (2023) and €2,382 (2024).
On the basis of the one-bed, he will have received a rent-free benefit of €94,470 around about now, a figure that will rise to more than €119,000 should he stay there another year. He is entitled to the small gift exemption on that and seeing as how he has two parents living (I presume from your query), that amounts to €6,000 a year, cutting the liability to date by €24,000, and by €30,000 if he stays until this time next year.
On the two-bed option, the benefit to date is almost €109,000 (falling to €85,000 after allowing for the small gift exemption). That figure will rise to €107,400 by this time next year, again allowing for the small gift relief.
That’s a substantial benefit in anyone’s book but it does not mean he has any actual tax bill to pay, yet. He is entitled to receive up to €335,000 from his parents by way of inheritance and annual gifts over the sum of €3,000 from each parent annually so even on our higher figure of €85,000, he is well short of this.
So he is guilty of nothing yet. The issue is likely to arise only when he inherits down the line or if he continues to stay in this apartment for another decade.
But it will reduce the amount he can eventually inherit tax free from his parents by that amount. Only they, and he, can determine if his current need for accommodation makes that trade-off worthwhile.
That €335,000 figure is likely to increase in the budget but the €70,470 or €85,000 offset will still be there.
How can Revenue police this? Well, that is also interesting.
As of now, liability to capital acquisitions tax is self-assessed and therefore it is up to the beneficiary (the son) to keep track of it. As it stands, he does not even have to let Revenue know anything until his benefit tops 80 per cent of the tax-free threshold – so, in this case, at least up to the budget, €268,000 – at which point he needs to declare it a return to Revenue even though no tax is due till the figure tops €335,000.
Of course, failing to make an accurate return if and when he does become liable can be a criminal offence which could be rather messy for him, his family and employers. Revenue can always join the dots, perhaps not now but possibly down the line. They have access to an awful lot of data and computers increasingly able to follow the money trail.
And having them come calling on you rather than the other way around is never a good idea. If caught, you are liable not only for tax due but for daily interest dating back to when it first fell due and penalties, even assuming you can stay out of court.
Could he get away with it? Possibly. I have no doubt many families have adult children in Dublin staying in places originally intended as college-era accommodation. He has to decide if he is comfortable with the stakes in that gamble and, as I say, it’s a decision he has to make only when he gets to within 80 per cent of the threshold.
Precisely because it considers the current rules too open to convenient “forgetting”, especially in precisely these sort of cases, Revenue is pressing to have every gift and inheritance reported to it, regardless of the sum involved as long as it is potentially taxable – so all inheritances and all gifts over €3,000 from any individual. If that were introduced alongside a higher threshold in the budget, it would make things even more difficult for people in this son’s position.
The fact that Revenue has been consistent in its focus on precisely this issue should in itself be cause for concern.
Finally, on your second question, if the son is gifting money to a parent to help the parent buy a property, the tax-free threshold is the much more modest Category B one applying to linear blood relations – €32,500.
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 with a contact phone number. This column is a reader service and is not intended to replace professional advice
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