Tax and timing: giving my second house to my daughter

I am 71 years of age and want to get my affairs in order. I bought a second house in 1990 for £70,000. It is now valued at €350,000. The house has been rented to various people over the years and my daughter has been renting it for the past five years. All rents have been declared to the Revenue and tax paid.

I would now like to give this house to my daughter as part of her inheritance. She has received no other gifts.

I was wondering what are the tax implications? Will I have to pay capital gains tax and will my daughter have to pay inheritance tax?
Mr T N

Getting your affairs in order is always a good idea even though, at your age, you can hopefully look forward to many more years of good health.

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This second house was clearly a canny investment and has certainly repaid your outlay over the intervening years. And, having kept things properly registered, filed and paid down the years you have rented it out, you now have a clean canvas to work with as you assess your options.

As you suspect, while there is nothing to stop you giving this property to your daughter, it might have some tax implications for both of you. The good news is that, in your case anyway, this can be addressed through timing.

You mention that you want to give the property to your daughter “as part of her inheritance”. As she has not previously received any gifts over the value of €3,000 from you in any one year, she has access to the full capital acquisitions tax (inheritance tax) exemption. This also presumes she has inherited nothing previously from her mother.

As you probably know, the scale of the exemption varies depending on the relationship between the donor and the beneficiary. In this case, as your daughter, she can receive up to €335,000 without facing any tax bill.

With the property being worth €350,000, she would have a tax bill to pay on the excess. At the prevailing inheritance tax rate of 33 per cent, the bill of the €15,000 excess would be €5,000.

Will timing help here? It’s impossible to say. The tax exemption ceiling for category A – the one covering parent to child – has been rising over recent years though that did not happen in this year’s budget.

The exemption ceiling was as high as €542,544 briefly back in 2009 before it was trimmed back sharply in the face of the financial crash. It was as low as €225,000 as recently as 2015.

The last government expressed an intent to raise it to €500,000. That may happen over time – in which case your daughter would be able to receive this property tax free and still have capacity to receive some other inheritance from you tax free – but there is no guarantee. There is certainly no way of specifically timing it.

What we do know is that recent increases have been relatively modest – raising the threshold €10,000 or €15,000 at a time.

I guess the bottom line is that you’re best off making the decision that suits you both rather than trying to time future increases, if any, in the threshold.

As an aside, given that this is not your home, your daughter cannot benefit from the dwelling house exemption, which would allow her to inherit the property without eating into her inheritance tax exemption.

This is available to people who live in a property with someone who later dies and leaves it to them. They must live there for a certain period – a condition your daughter would fulfil – and not own any other property, but it must also be your only or main home and this clearly is not.

Capital gains

As for you, there will certainly be a capital gains tax (CGT) bill if you transfer the property now to your daughter. This is not your home but an investment property that has been rented out over the past 30-plus years. There will be no exemption.

I’ve previously gone through how CGT is assessed for a property like yours. Allowing for inflation (up to 2002) and converting from punts to euro means the base “purchase price” of your property for tax purposes is about €130,000. That leaves you with a gain before allowable expenses of €220,000 and a tax bill of about €73,000.

Now, in your case, timing certainly does make a difference. As long as you transfer the property in your lifetime, you will face a bill of the order above. However, if you leave the property to your daughter in your will, there is no difference in her position tax-wise, but capital gains is no longer an issue. Your estate does not get landed with the €70,000-plus bill.

So it really is a case of how important it is for you and your daughter that the property is transferred now – incurring a substantial tax bill – or upon your death, when there will be no CGT bill and the inheritance tax exemption ceiling may (or may not) be higher.

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.