Inherited property came with a loan attached

Q&A: Your personal finance questions answered

Photograph: iStock

Photograph: iStock

 

I wonder if you can answer a question for me. I inherited a house a number of years ago. I recently sold the house and am looking to calculate the Capital Gains Tax (CGT) on the gain.

I know that to calculate the gain it’s the difference in the sales price and the market value of the house on the deceased death, less allowable costs such as estate agent and solicitor fees. The gain is about €30,000.

However, at the time I inherited the house there was an attached loan with the house of about €20,000 (it wasn’t covered by life assurance etc). I had to pay the loan off to the bank.

I know that normally CGT doesn’t take into account mortgages but in this case, is the the cost of the loan an allowable deductible cost for CGT purposes?

Ms SO’H, email

Most loans attached to properties are paid off by associated life assurance policies when someone dies. Most, but not all. I have come across some previous cases where older people have taken out a mortgage on their home even though age or health conditions mean they cannot find anyone to agree to issue a mortgage protection policy.

Generally this happens in cases where people have limited other assets or savings and are looking to release equity to meet their ongoing living expenses.

Someone wishing to do this would have to find a bank willing to consider the arrangement and they are as cautious as they ever were right now. However, if the amount is modest compared to the value of the home – as it appears to be here – and the person was dealing with a lender who knows them and the property (ie, most likely the previous mortgage issuer), it is certainly possible. After all, the bank still get security over the property.

And that’s what has happened here. When the person who bequeathed you the house died, the bank had first call in order to get its €20,000 back. That had to be paid before the bequest was transferred to you.

You say you paid the money. That sounds odd. I would have thought it should have been paid out of the estate by the executor before any bequests were made. Of course, it is perfectly possible that you were the executor and that there were no other financial assets that could have been used to pay the bill.

The alternative then would have been to liquidate the assets (sell the property) and pay the bill, with the residue to its value going to you.

The thing is, having paid the money, are you now entitled to deduct it from capital gains tax due on the sale of the property?

That’s not how it works, I’m afraid. Just to be sure, I checked with Chartered Accountants Ireland, which is an industry body for the profession and Norah Collender, professional tax leader at the organisation, confirmed the position.

She points to Section 573 of the Taxes Consolidation Act 1997 which states that, “for the purposes of capital gains tax, assets transferred on a death are deemed to be acquired by the personal representatives or other person on whom they devolve at their market value at the date of death”.

In other words, there is no provision to take a deduction for a loan on this property in calculating the taxable gain for CGT purposes.

She also confirmed that the loan on the house would have been deductible at the time the estate was being executed so that you would have received the inheritance at an “incumbrance-free value”.

So, if the property had a market value at that time of, say, €300,000 with a €20,000 loan attached, the value of the inheritance to you would have been €280,000 in terms of assessing how you stood with the relevant inheritance tax-free threshold and any liability you might have had at that time to inheritance tax.

Ms Collender helpfully points to section 28(1) of the Capital Acquisitions Tax Consolidated Act 2003 as the relevant legal clause.

This should have been sorted at the time of inheritance (and maybe was). In any case, you cannot defray your current €30,000 capital gain by using it now.

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.

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