Can I use the small gift tax exemption as rent relief for my son?
Q&A: Your personal finance questions answered
‘You clearly wish to accommodate your son and his family in purchasing the house.’ Photograph: iStock
My son, his partner and three young children live in a house that my wife and I own. He has been paying rent to us for the past three years. We declare the rent to Revenue. My question is; can I use the small gift tax exemption to offset the rent: €6,000 to him, €6,000 to his partner and €6,000 to each of his three children from my wife and I?
I’ve looked at selling him the house but he cannot get a loan to buy it. We bought it for €250,000 and it’s valued at €360,000. Selling to him for what we paid will, I think, cost us €33,000 in capital gains tax (CGT). It seems Revenue has our hands tied no matter which way we turn. Can you advise?
Mr DO’B, email
This taps into every parent’s silent dread. We all want our children to do well, to grow up as fine people and to be able to stand financially independent as adults. And if, for any reason, that doesn’t happen, our protective instinct is to step back in and try to make things easier for them where we can.
Unfortunately, tax officials aren’t so taken with this notion. To be fair to them, they are simply enforcing the law – in this case ensuring that any financial gifts over and above the gift/inheritance tax thresholds we all have are properly accounted for.
Well, not quite. As it happens, when it comes to the rules restricting financial support to adult children from their parents, it was Revenue that suggested the law needed tightening in the first place. But the impetus for the recommendation was not some wish to make hard cases even tougher for people. No, as usual, it was down to the more prosaic example set by some wealthy parents who ran a coach and four through the previous rules for their own estate management purposes and to ensure they could gift their children gilded lifestyles without any tax bill.
It is normally those with plenty of money already who are best situated to avail of loopholes in tax law and to pay for the professional advice to point towards them. But, be that as it may, the rules as they stand say you cannot provide financial support for your son and his family without them running the risk of a tax bill once the amounts exceed certain limits.
And this is where we get to the small gift exemption.
Small gift exemption
At the outset, I should say that I will be wrapping a question from another Irish Times reader with this answer as it too concerns the use of the small gift exemption as rent relief.
So what about your plan to help your son out with the rent that he and his family are paying you, by both you and your wife using the small gift exemption to gift each of him, his partner and the children €3,000 from each of you, or €6,000 together?
As an idea it is fine . . .up to a point. There is absolutely nothing wrong with gifting €6,000 to each of your son and his partner and for them to use that money effectively to defray the cost of the rent they are paying you.
There is no set procedure for paying a gift under the small gift exemption
However, the key restriction of the small gift exemption is that it must be for the sole use of the recipient. You cannot say that the three children have any obligation to pay the rent on their family home. So giving each of them €6,000 a year, with the intention that it go to defray the rent, will not be acceptable.
If that were to happen, Revenue simply considers that the gift has been made to the parents and, given there are three children, they will find themselves with €18,000 that will be set against their lifetime capital acquisition tax thresholds which clearly runs counter to your intention.
At this point, I should address the separate query from Ms PH. She also wants to set up a payment of €3,000 a year to her adult child by way of rent relief and wants to know what the procedure is required to do so. She also wants to know whether she, or her child, needs to notify Revenue of the arrangement.
The answer here is straightforward. There is no set procedure for paying a gift under the small gift exemption. She could set up an annual payment instruction, transfer the money online once each year, write a cheque or even hand over cash. It doesn’t matter.
I would, however, suggest, that both sides keep a record of what the payment was for – ie, to avail of the small gift exemption – just in case Revenue gets curious about either person’s financial affairs for some other reason down the line. And no, neither party needs to notify Revenue that she is making, or her child receiving, a financial gift (or rent relief) under the exemption.
Returning to your gifting money to your grandchildren, there is of course nothing to stop you using the exemption to gift money to the children but it would have to be for their own use or savings, not for general family budget purposes.
Setting that aside for a minute, you clearly wish to accommodate your son and his family in purchasing the house. You say he cannot get a mortgage to allow him to do so. It’s not clear whether that mortgage lockout is on the basis of the current €360,000 valuation or the lower “no profit” value of €250,000.
Either way, it’s not going to affect your tax position. Regardless of what you sell this property for, and to whom, you will be liable for capital gains tax on the difference between the current value and the purchase price (minus some allowable purchase and selling expenses such as legal and estate agent fees).
If the house is worth €360,000 and you bought it for €250,000, your gain is €110,000 and the CGT bill will be €36,300.
If he can’t get a mortgage even for that sum, you could always treat that €250,000 as a loan from you to him
Selling it to your son at the lower figure will not affect that bill. What it will do is see Revenue consider the €110,000 as a gift to him from his parents. That means it will use up €110,000 of the amount he can receive from you both over his lifetime – currently €335,000. As such, he will likely face a bigger bill on any eventual inheritance.
But, and it is a big but, it appears to me from your letter that his need is now and so too is your desire to get this sorted. If he can secure a mortgage to meet the €250,000 “no profit” price, it might be a better use of the inheritance/gift tax threshold.
And, if he can’t get a mortgage even for that sum, you could always treat that €250,000 as a loan from you to him. He and his partner could continue to make monthly payments equivalent to their current rent payments, or more if possible, but it would effectively be set against the loan and not as rent.
That would also have a tax advantage to you as you would no longer be paying tax at your marginal rate on rental income.
Yes there will be some legal costs to have the property put into his name (and to draw up a formal loan agreement which is a good idea anyway and helpful if Revenue should come knocking on your door), but it is still doable.
My understanding is that the interest charged on the loan would have to at least match what you could expect to receive in the Irish market if you deposited the €250,000 in an account here.
Given savings rates here are currently at, or perilously close to, zero that would not be much of a burden – and one that could easily be met by continuing small gift exemption payments if you chose to do so.
And your own CGT bill? Well that amounts to not much more than what you propose in your question to pay the family as a whole in one year.
The whole project is not without complexities, but it is certainly achievable if that is what you wish to engineer.
One other small caveat. Should you or your wife need to go into nursing home care and wish to avail of the Fair Deal funding scheme, any money gifted by the person over the previous five years will be treated as assets in a virtual clawback process.
It won’t affect your son and his family but it could impact on your own budgeting. But that’s a story for another day.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into