Elderly parents living in property you own will save you on capital gains tax

I bought a house in 1997, primarily so that my parents could retire and live there rent-free, though it was also my home for a time.

After about six months I ended up renting a flat in Dublin and was only with my parents at the weekends. I eventually bought a house in Dublin in 2004 and the house in Dublin became my PPR (principal private residence).

My father died in 2009 and my mother continued to live on in the house until her death in 2017.

I am in the process of selling the house my parents lived in and I am trying to assess what my capital gains tax liability will be. I have a few questions that I hope you can help me with:

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1) I consider that this property was my PPR from 1997-2004 even though I rented in Dublin and was only in the property at the weekends. Am I correct in this assumption?

2) Should the CGT be based on the change in value of the property between now and 1997, or between now and 2004 when the house in Dublin became my PPR?

3) I thought I read somewhere that if a widowed, dependent person, lived-rent free in a property, then this period is exempt from CGT. Is this the case? Or did I imagine it?

After my mother was widowed she received the widow’s pension and a small pension that came through my father – about €100 a month – I don’t know what dependent means.

I never received any rent from my parents in all the time that they lived in this house. I tried to get clarification on these issues from Revenue but they didn’t really address my questions.

Ms JN, email

To be fair to the Revenue Commissioners, they are not tax advisers. They can clarify what the rules state but they are not in the business of giving interpretations.

Still, I would have thought that they should have been able to help in part with at least one of your queries, possibly the most interesting, and that is the third issue you raise – the relief granted against capital gains on a property in which a dependent relative lives, rent-free.

It's not an area that crops up very often but I did write about it over a decade ago. The relevant legislation is section 604 of the Taxes Consolidation Act 1997 and it is tailor-made for the position you find yourself in.

Section 604 grants relief from capital gains for a house that is provided rent-free to a “dependent relative”.

It states: “Where as respects a gain accruing to an individual on the disposal of, or of an interest in, a dwelling house or part of a dwelling house which is, or has at any time in his or her period of ownership been, the sole residence of a dependent relative of the individual, provided rent-free and without any other consideration, the individual so claims, such relief shall be given in respect of it and of its garden or grounds as would be given under this section if the dwelling house (or part of the dwelling house) had been the individual’s only or main residence in the period of residence by the dependent relative, and shall be so given in addition to any relief available under this section apart from this subsection...”

All of which is a very legal-speak way of saying that if you provide a home rent-free for your dependent parents, then, for the purposes of capital gains tax, it is considered to have the same status as your principal private residence.

One property

There is one, clearly sensible, restriction: you can only claim this relief for one property at any given time. So, for instance, if you provided rent-free accommodation to more than one dependent relative in separate homes, only one could avail of this relief. This is a basic step to prevent abuse of the relief.

Clearly, once the dependent relative dies, the relief ends, so you would be liable for any gain from when your mum died in 2017 to when you sell it.

The other issue is determining who is a “dependent relative”. The legislation also defines this: it says a dependent relative is someone “incapacitated by old age or infirmity” from maintaining themselves.

So it is not necessarily a financial thing, although clearly that could play a role. More importantly, for you, is whether back in 1997 – over 20 years ago – either parent could reasonably have been described as incapacitated by old age or infirmity. It could well be but it is something Revenue might query, as providing accommodation rent-free, of itself, does not grant access to the relief.

There is provision in section 604 for providing accommodation rent-free to a widowed parent, so you are certainly covered from the date of your father’s death in 2009 regardless.

Your home

The bigger issue here might be whether the property was ever your principal private residence.

This may be a moot point if Revenue accepts your parents were dependent from the time the property was bought in 1997 and they moved in rent-free. But if that is challenged, they will then examine whether the property could otherwise be considered your main home – or principal private residence.

And the issue here is that, in Revenue terms, a principal private residence is one that you own and occupy as your main or only residence.

In this case, you certainly owned the house, and no other property. But as you were living in Dublin for the majority of the time, it could be a stretch to argue that it was your main residence.

Revenue might not pursue this as you owned no other property, but they might.

There is an exemption if you could argue that you could not live there because of the demands of your job, although this applies only for a maximum of four years.

If Revenue accepts that this was your main home right up to 2004, there is not likely to be any capital gains charge, full stop, as your parent lived there rent-free from then on.

Capital gains

But what if they don’t, and/or if they don’t accept your parents were dependent by reason of incapacity or infirmity for the whole of the period from 1997? In that case, capital gains tax will become a potentially significant issue, which brings us to your second question.

And the answer here is clear. In assessing capital gains tax, the relevant start date is the date on which you acquired the property back in 1997. If it comes to that, Revenue will make allowances against this pro rata for the time it was your main home and also the period in which it is eligible for relief by virtue of the section 604 rent-free occupation by your parents.

And the last 12 months of ownership will also be considered as owner-occupation regardless of the reality, which will shorten the time from your mother’s death in 2017 that will have to be taken into account. Of course, you will have a capital gains tax liability between your mum’s death and 12 months before you eventually sell the property in any case.

Bottom line is that your case for relief depends (a) on Revenue accepting this was your principal private residence from 1997 to 2004 and/or (b) that your parents were dependent relatives as far back as 1997. It’s not straightforward, which is presumably why Revenue was coy about giving direct answers.

Only you can know the circumstances: it is certainly worth your while making the case but you might need to persuade Revenue.

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.