Buying a house with a partner who is providing bulk of the funds
Q&A: Dominic Coyle
The problem: in the tax authorities’ eyes, your partner is effectively “gifting” you a large part of your half share of the money.
My partner and I are in the process of buying a new home. I have been told I must pay inheritance tax as the house we’re selling is my partner’s. Could you tell me is there any way round me having to pay the inheritance tax?
Mr R.B., email
Like so many of these queries, the initial answer was “it depends”. It was unclear who had told you that you might have a tax liability so it was unclear where they were coming from. However, you have since clarified for me that the house you are selling was solely in your partner’s name and that it is the proceeds of its sale will largely finance the purchase of your new home which, not surprisingly, will be in both your names.
The problem here for you is that, in the tax authorities’ eyes, your partner is effectively “gifting” you a large part of your half share of the money that you as a couple are putting down as a cash payment for the purchase of the house .
The money comes from the sale of their property and is therefore theirs, not yours.
So why is that a problem?
Well, there are rigid rules on what one person can or cannot gift to another without having to consider the issue of tax. And the thresholds on what tax free gift may be made are determined by the relationship between you and the other person.
Of course, it’s not an issue for small gifts. In fact, you could receive a gift of up to €3,000 from your partner – or anyone else – annually, and still not have to worry about tax at all. That’s called the small gift exemption and it’s something with which regular readers of this column will be very familiar.
Thereafter, as unrelated partners, you can receive lifetime gifts of only €16,250 from each other. If your “gift” is over the threshold, you are liable to capital acquisitions tax – otherwise known as gift tax, or inheritance tax (depending on the circumstances in which you find yourself liable to it).
That is levied at 33 per cent on anything over your threshold plus the small gift exemption.
So, assuming you have not previously received an inheritance or large gift from anyone other than a parent, sibling, aunt/uncle or grandparent (and great-grandparent), you will be taxed at 33 per cent on any deemed gift over the sum of €19,250.
This is a big issue for unmarried couples living together in long-term relationships. So how can you get around it?
By far the easiest way is to get married. Gifts between spouses are not taxable.
Otherwise, you can try to persuade the Revenue that you own the property in unequal shares, with your partner’s larger share reflecting the proportion of the purchase price that they have contributed.
In most cases, a couple owning a home will do so as joint tenants. That means that both are effectively full owners of the property. If one dies, the home automatically passes to the other under something called survivorship. It does not form part of the dead person’s estate for the purposes of any will.
The alternative is to own the property as tenants in common. This is less common, not least as each owner only owns a certain percentage of the property. When they die, the dead person’s share of the home forms part of their will and can be passed on to someone other than you, their partner.
The disadvantage, clearly, is that the person (or people) that they name as beneficiaries are likely to have no interest in living in the home and will want it sold so they can access the value of their inheritance.
For the remaining tenant in common, however, it is their home and, already grieving, the last thing they will want is to be forced to sell their home. That’s why it is an unusual choice to make for such a purchase.
The possible advantage here is that, if you were tenants in common, the ownership of the house could reflect the money each of you put into its purchase. Tenants in common do not have to hold equal shares in a property.
I say “try” because I would be sceptical if Revenue would accept such an interpretation and it would also have to be reflected in the deeds of the property. That, in turn, could present difficulties with the lender who is giving you the mortgage.
I know it sounds radical but getting married is the most practical way around this. But do it before your partner puts the money from the sale of the house into the new home purchase, just for clarity.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email email@example.com. This column is a reader service and is not intended to replace professional advice