I am a widower living alone in my principal private residence. I own another residential property that is free of mortgage which my married child has lived in rent free for a number of years.
The current market rent might be, say, €2,000 per month.
On my death, that property will form part of my estate which will be divided equally between all my children. I am concerned re possible taxation issues for myself and/or my child either now or on my death.
Mr M.K.
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In the middle of a housing crisis, I have no doubt that your married child is very appreciative of having access to a home rent free but it might not be quite as free of consequences as they hope.
You and they are certainly far from the only people who find themselves in this position. A potential tax liability is, I’m guessing, the last thing on a person’s mind when they get a welcome offer of cheap or free accommodation as they start out in their adult lives.
The good news is that there is no bill for immediate payment likely to land through anyone’s letter box or email inbox here. And you, yourself, have no tax concerns now or down the line. But your child is borrowing from their future.
Revenue has very tight rules about financial support for adult children, rules that were tightened several years ago when they suspected the old, looser rules were being abused by wealthy parents who were fundamentally paying for their children’s lifestyle as part of their tax planning.
I’m not remotely suggesting that is what is happening here but those tighter rules do mean that any financial support you give your adult child is seen as a gift, one that will be offset against the lifetime limit of what they can receive from their parents.
That may be all right with both of you as long as everyone understands the position. It may well be that now is the time of your child’s more acute need rather than sometime in the future when they will receive an inheritance from you.
A child can currently receive large gifts during their parents’ lifetime and inheritances from their parents of €400,000.
Under that figure, there is no tax due; anything over it is taxed at 33 per cent under the heading of capital acquisitions tax, often better known as inheritance tax or gift tax.
This is a self-assessed tax. It is the responsibility of the person with the liability – which in this case will be your child if their financial benefit tops €400,000 at any point – to file and return with Revenue. In fact, with capital acquisitions tax, Revenue requires a person to inform them when they exceed 80 per cent of a particular limit.
So, in the case of category A covering gifts and inheritances from a parent to a child, that is at €320,000. In relation to category B’s €40,000 tax free threshold covering all large gifts and inheritances from linear blood relatives – sibling, grandparents, aunts and uncles – the 80 per cent point kicks in at €32,000, and at €16,000 under category C’s €20,000 tax free limit for gifts and inheritances from any more distant relatives, friends, in-laws etc.
I mention “large gifts” rather than gifts. Everyone is entitled to receive up to €3,000 a year from any other person under what is called the small gift exemption. Your child could receive this €3,000 from you with no tax liability even if they also received €3,000 from an in-law.
So let’s get back to the benefit this child is receiving with their rent-free accommodation.
You reckon the market rent for this apartment or house this year is about €2,000 a month, or €24,000 a year. Subtract the €3,000 small gift exemption, and €21,000 is set against this child’s capital acquisitions tax allowance.
If the rent stayed at that level for the next five years, the amount they could receive from you tax free by way of inheritance would fall by €105,000 to €295,000.
It’s obviously not quite as clear-cut as that as market rents change year by year. When you die and this property is then being divided among all your children, the child living there will need to calculate the market rent for each of the years they were living there.
They can then discount €3,000 a year to allow for the small gift exemption. The rest is set against their tax free inheritance limit. Revenue will, unsurprisingly, have its own understanding of market rents so it make sense to play fair when your child is working this out.
Keeping records of market rent in each of the years they occupy the house as they go would make the job easier for them.
Is it possible they use up all their tax free wriggle room. It is. It depends on how long they have been living here and how ling you survive. If it happens while you are still alive, they will need to start paying this tax on an annual basis.
Of course, the tax free limits themselves change. Before October 2024, the category A parent to child allowance was a more modest €335,000. The figure was briefly as high as €542,544 as recently as 2009 at a time when it was indexed to inflation before the financial crash, and as low as €225,000 between December 2012 and October 2015.
Fine Gael previously said under the leadership of Leo Varadkar that they wanted to get the figure up to €500,000, although there has been precious little said on that subject in recent years.
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
