Facing a CGT bill for house inherited from father back in 1993
Capital gains tax indexation up to end of 2002 takes some sting out of tax bill
Whan calculating capital gains tax on the sale of a property, you are allowed deduct the costs of buying or selling it.
Our father died in 1993 without making a will. His only asset was the family home, a small, council-built house. As such, all seven children were entitled to a share of the house.
One family member remained living in the family home. They were not in a position financially to buy out the other family members and none of the siblings would have forced them to leave their home in order to sell the property.
The title deeds were changed in 2004 to reflect the joint ownership of the house by all members of the family.
Our sibling died in 2017 and the house has recently gone sale agreed.
Can you please advise if there is a capital gains tax [CGT] liability on any increase in the value of the house from the time it was inherited on our father’s death. If so, how would this be calculated? Are there exemptions for situations such as ours where we could not sell because a family member still lived there?
Ms M.C., email
Boy, this one goes back a long time and shows how even fairly straightforward issues can be complicated by family issues.
In tax terms, however, this is fairly straightforward. In the absence of a will, your father’s seven children all inherited on his death intestate in 1993. As the only asset was his home, you each received one seventh of the value of the property at that date.
An entirely understandable choice was made that the one family member who could not afford to otherwise buy a home and who was living in the property should be allowed to continue living there. But this was a voluntary family decision and has nothing to do with tax liability – with one exception, and that is the liability of the sibling still living there.
As this would have been their main family home, no CGT liability would have arisen for them. Even if it had, capital gains liability is written off on death.
For the rest of you, this is an investment property and there is a capital gains tax liability on the difference in the value of the property when you inherited it and its value when it is sold. For each of you, the gain is a seventh of that increase.
There is one factor mitigating the liability. Capital gains tax indexation existed up to the end of 2002 to increase the base or original cost of an asset in line with inflation. It was eliminated then by the then minister for finance, Charlie McCreevy, for no very good reason except that it was a cheap win for the exchequer.
You don’t say what the value of the property was in 1993 or when in that year your father died but, if your dad died on or before April 5th, you multiply the value of the property at that time by 1.356 to find the new base cost. If he died after April 5th, the multiplier is 1.331.
So, if the property was worth £125,000 back then, and he died on April 4th, say, the new base cost is 125,000 x 1.356, which is £169,500. As you can see, it makes quite a difference.
Also, back then we were working in punts and now we have euro, so you need to convert the 1993 price into euro to see what the real base cost was when you and your siblings inherited.
To do this, you divide the punt figure by 0.787564. So your £125,000 value becomes €158,717: your indexed £169,500 value is €215,220.
So you take the difference between that new euro value of the original 1993 worth of the property, index it and then subtract that from the current sale price.
You are also allowed deducted the costs of buying or selling the property. So any legal costs in selling the property – estate agent fees, advertising, legal conveyancing, etc. Say you sell for €400,000 and fees amount to €15,000. Assuming he died early in 1993, the gain is 400,000 minus the fees, so 385,000 from which you subtract the original 1993 value, €215,200. So that is €170,000.
Dividing that by seven, you each have a gain of €24,285. You are entitled to a CGT exemption of €1,270, so each has a taxable liability on €23,015. Tax is paid at 33 per cent, leaving you – on the basis of these figures – with a bill for €7,671 each.
Adjust these figures for the actual value of your dad’s home back in 1993 and the selling costs incurred, and you’ll get an accurate liability figure for each of you.
Your dead sibling obviously has no CGT liability but whoever inherited their share might have over the intervening two years.
The fact that the house was only put in the seven names back in 2004 should not affect the tax position.
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.