Family arrangement on property could leave you both out of pocket
Q&A: Dominic Coyle
If someone rents out a property, Revenue will assume that it is being done at the market rate for the property’s area. Photograph: Kate Geraghty
I have a query about rental income. A close relative of mine owns a second house which he inherited in 1996 and which is derelict for 20 years. He is 62, nearly pension age but does not want to rent it or sell it, as it may affect his pension entitlement later on.
I am a PAYE worker. My question is, can I refurbish the house and keep the rental income as mine and pay tax or will he be liable for tax? Could he rent it to me for a nominal sum of €1 a year and allow me to sub let?
We are considering a 10-year plan where I would renovate and maintain and rent the house to tenants and he would receive no income from the property for the 10 years.
Mr J.K., Kerry
First up is to sort out what sort of pension your close relative is looking at. I am assuming it is a non-contributory pension where he will be subject to a means test?
That means he has not built up sufficient PRSI payments, or stamps, to qualify for a normal contributory State pension.
If this is incorrect, and he does have the stamps, he should stop worrying. A contributory State pension is paid regardless of means as you have built up entitlement to it over a working life. In that case, receiving rental income will make no difference to the pension payment.
He would, of course, have to pay income tax and USC on the rental income in retirement but that would only be taken from gross rental income and would not affect his pension.
If he is subject to a means test, however, rental income could well impact what he receives from the State.
A means test would look at both cash income and income from assets. Cash obviously includes any money he earns through a job. It also includes farm income, any welfare income he might receive from another country and income from maintenance payments, where applicable.
Then there are his assets. His own home is exempted, unless he is renting out a room or rooms in it. Even then, certain deductions apply but, essentially, 80 per cent of rental income would be taken into account.
Whatever about the family home, any other property – such as this second house – savings or investment is taken into account, whether you are getting any income from it or not.
The first €20,000 of savings is discounted. Thereafter, the means test assumes that you earn €1 per €1,000 from any assets between €20,001 and €30,000 in value, €2 per €1,000 for anything in the next €10,000 and €4 per €1,000 on any savings or asset worth more than €40,000.
Even if that house is derelict, it and any land it sits on will have a value, so leaving it as it is might not save your relative from a means test.
So, what about if you rent it and pay him a nominal rent?
That’s not likely to work either – although it could be you that pays the price.
If he is renting you the property, Revenue will assume that it is being done at the market rate for your area. If it is, grand, though €1 a year is not going to fool them.
If it is not, Revenue will assume that the difference between what you are paying and what the actual market rent for such a property in your area should be is a financial gift from him to you. That won’t affect your income tax but it could well land you with a bill for capital acquisitions tax – known more commonly as inheritance tax or gift tax.
This is levied at 33 per cent above a certain threshold. The threshold depends on the relationship between you and this relative. If it is a parent, the threshold is €320,000 but that falls sharply to €32,500 if it is a brother, a grandfather , an uncle; and even further if the relationship is more remote, to €16,250.
At those lower levels, it wouldn’t take long for the “presumed” gift of rental you are not paying to hit the threshold, leaving you with ongoing tax bills thereafter.
And remember that these thresholds are cumulative. So. if you have already received an inheritance from, let’s say, an uncle, then this is the base level before you add any of the presumed rent. The same applies for all the thresholds.
If you do rent it and receive rental income under a sublet arrangement, it is the case that any income tax, PRSI and USC will be down to you, not him.
And of course, if the derelict house is refurbished and rented, it will necessarily be worth significantly more than it is in its current derelict position, and that would be taken into account by the Department of Social and Family Affairs when assessing his assets for the purposes of determining how much pension he would be entitled to.
Either way you look, the move you are considering will likely have tax implications for you and for him, as well as impacting a means test if one applies to his pension. I’d think carefully before proceeding.
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.