Mother-in-law’s gift could create a tax headache
Q&A: Dominic Coyle
The complexity of family arrangements never loses the capacity to surprise. Photograph: Nick Bradshaw
My mother-in-law has advised she is going to bequeath one of her houses, not the main family home, to my wife.
My wife now wishes to move into that house and live there before her mother dies. We are going to retain our existing home as our grown-up children still reside there.
Are there any tax implications that may arise with this arrangement. The value of the property she will inherit could be in excess of €400,000. The property is in need of renovation, possibly costing €30,000.
Mr M.F., email
The complexity of family arrangements never loses the capacity to surprise. In this case, there are potential tax implications for all three generations – your mother-in-law, yourselves and your children.
This property is not your mother-in-law’s main home so, for her, it’s an investment property. That has no implications for you though it does for her, especially if she has let it out at various times as I assume she has.
The biggest issue for her is that, if the property changes ownership now, she faces a possibly hefty capital gains tax bill. If it does not change ownership until she dies, the capital gain dies with her.
That, presumably, is why she is happy for her daughter to move into the property now (I assume she is happy with that arrangement) even though ownership of the property will not pass until she dies.
However, there do appear to be some issues arising from your wife’s side, and yours.
First up is the inheritance tax issue. The current limit on the aggregate amount a person can receive tax free from both parents is €310,000.
You say that this property is currently valued at €400,000. That, in itself, would put your wife beyond the tax-free threshold in relation to €90,000 of the value of the property and leave her with a tax bill of €30,000 as the rate of inheritance tax is 33 per cent.
And it could get worse. The relevant valuation of the property for inheritance tax purposes will be its value when your mother-in-law dies, not its current value – even if her daughter has already taken occupation on whatever informal basis is agreed. In a rising property market, the likelihood is that the value will have risen, and so will the tax bill.
And what about any other inheritance – or indeed any major gift your wife has received from either parent over her adult life, anything worth more than €3,000? Did she inherit anything from her father yet? Will she inherit anything other than this property from her mother when she dies?
As the total she can receive in her lifetime is €310,000, anything beyond this house would also be taken into account and means she could well have a much higher tax bill when her mum dies.
Of course, the Minister for Finance, Paschal Donohoe, might raise that threshold in today’s budget. The Government has said it wants to raise the parent-to-child threshold to €500,000. But, given the competing demands on the budget kitty this time around, I imagine change, if any, will be minor.
Then you have the fact that you will now own two homes – your mother-in-law’s property and your own current family home. You say you intend to hold on to both.
The basic Revenue rule is that you can only have one family home at any time. Anything else is an investment property. The importance of this is that only the family home, or principal private residence, is fully exempt from capital gains tax.
If you and your wife are making this new property the family home, then your current home becomes an investment property. If it is rented out, you face your own tax charges on the rent etc and a capital gains tax charge on part of the gain when you eventually sell it. The capital gains tax will be assessed on the portion of period of ownership during which the property was rented.
But you are not renting, I hear you say. Your own family, your grown-up children, will live there.
Yes, but the key here is that they are grown up. Revenue has tightened up the rules considerably on parents providing ongoing financial support for adult children. Frankly, unless they are under 25 and in full-time education – or dependent on you by way of disability – then they are not entitled to free board and lodgings other than in the family home.
And that means that they are receiving a gift equivalent to the notional rent that your the property would command in the market. That rent is divided between them and, assuming they don’t pay it, is deducted from their €310,000 lifetime tax-free limit of what they can receive from their parents by way of gifts and/or inheritances.
If the notional rent is, say, €3,000 a month and there are two children, each is receiving a “gift” of €18,000 a year. They are entitled to €3,000 of this tax free by way of a small gift exemption, leaving the €15,000 to be deducted from the €310,000 threshold.
It might make more sense to leave things as they are until the property is actually inherited and see what the family circumstances are at that time. The decision is yours.
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.