Grappling with confusion over tax on gifts from parents
Q&A: Dominic Coyle
TThe CAT Act allows you as a “child” to receive up to €225,000 in total from December 5th, 1991 onwards from both parents without having any liability to capital acquisitions tax
You wrote recently about parents helping out a child buying a home.
In relation to working out market rent on a property, you say that even if the benefit exceeds the €3,000 exemption, you will not be facing the prospect of an imminent tax liability as the excess will be set against the lifetime threshold of €225,000.
I believed that any gift over €3,000 in a calendar year was subject to CAT and/or a declaration to Revenue.
I am in a position that my parents want to give me a sum of around €20,000 for a house deposit and although I haven’t received any gift before, we were led to believe that I would be subject to CAT on any balance over €3,000 received in 2015.
Can I receive a lump sum of, say, €20,000 in 2015 and not be subject to CAT with only my overall threshold being reduced by that amount?
Mr CB, email
I’m conscious that some people are, by this stage, well ticked off with the repeated discussion of capital acquisitions tax but as the passing of wealth from one generation to another is one of the most fundamental transfers in our lives, it is clearly a matter of great interest – as attested by the postbag I receive weekly on the subject.
Furthermore, as your query clearly illustrates, people are being given an awful lot of poor advice.
I can’t imagine who might have told you that you would automatically be subject to capital acquisitions tax and/or a declaration to the Revenue if you received more than €3,000 in a tax year and where they would have got such misinformation. The most generous interpretation I can put on it is that the person(s) was suggesting that you would come under the terms of the Capital Acquisitions Tax Consolidation Act, 2003.
That much is true, but only in the sense that you have to consider how the gift is treated, not that you face any immediate liability or reporting requirement.
To be crystal clear, the CAT Act allows you as a “child” to receive up to €225,000 in total from December 5th, 1991 onwards from both parents without having any liability to capital acquisitions tax. This threshold does change from time to time (it was as high as €542,544 at one stage in 2009) but I don’t expect it to alter radically in the next few years.
You do have to notify Revenue but only when you reach 80 per cent of that threshold – ie at or over €180,000. You are talking about a sum in the region of €20,000 so, assuming you haven’t already received €160,000 or more from your folks, you have no requirement to talk to Revenue.
You refer to your parents being able to give you €3,000 to avail of the small gift exemption. As both are alive, they can each give you €3,000 in any year – ie €6,000 between them, which would reduce the amount you would have to set against your lifetime threshold of €225,000.
Finally, you refer to “notional rent”. I did not allude to that. It is something that would apply only if your parents bought the house entirely and allowed you as an adult child to have free use of it. In that case, the amount they would normally receive in rent on the property in the open market would be considered an annual gift to you – and would count against your lifetime limit after the first €6,000.
What I did mention was “notional interest” but that was in the context of the €20,000 being a loan rather than being set against your lifetime threshold. Essentially, your parents could class the €14,000 ( the €20,000 minus the €6,000 small gift exemption) as a loan and the amount you would technically pay in interest on this would be taken account of under the small gift exemption.
Maybe it’s easier with an example. Your “loan” is €14,000. Just for illustration purposes, let’s use the Bank of Ireland personal loan rate which is currently 11.5 per cent. On that basis, the “interest” on your €14,000 “loan” would be €1,610 a year.
Your parents could deem that they have “given” you this under the small gift exemption in future years and still have the capacity to give you €4,390 between them as long as both are alive, or €1,390 if only one survives.
I know it can be a bit confusing but it is worth pursuing, especially if it is the difference between affording your new home or not.
Will parents pay tax for helping son?I read with interest your response to the parents’ letter querying how the taxman might view assistance of €60,000 to their son to help with the purchase of a house. If they provided a loan at 5 per cent, would the parents then have to pay tax on this income?
Mr JO’D, email
I imagine they would – or at least set it alongside other income to see if they hit the tax threshold. It is, after all, income, whether they see it in cash form or otherwise.
Is it not the case that the €60,000 could come within the €225,000 lifetime aggregate threshold ?
Mr JS, email
You’re right, it could. But the reader in question was looking to structure the gift as a loan which is why we framed the answer as we did to take them through the issues in that process.
Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice.