Staying in our home after gifting it to son ... and keeping peace with other children
Q&A: Dominic Coyle
Gifting a house has tax implications and, depending how you proceed, the sums could be significant, including the person being gifted the property
We are in our mid-70s and have six adult children. We have a house valued at approximately €600,000 and one of my sons has declared an interest in it.
My wife and I have agreed that my son would give €80,000 to each of our five other children. My wife and I would live in the house for the remainder of our lives.
My son has his own home and, when it is sold, would secure enough money to pay €80,000 to each of our other children.What we require to know is what is the best procedure to take to address this query regarding tax and any other issues that would apply.
Mr J.F., email
Nothing like complicating an already tricky issue. There are two separate elements here – first, as I understand it, you want to gift the property to one of your sons with a right of residence for both of you, his parents, for the remainder of your lives. Then, there is an entirely separate arrangement under which this son will pay a sum to each of his siblings, presumably in recognition of the fact that they will not inherit any part of the family home.
Both have tax implications and, depending how you proceed, the sums could be significant, especially for your children, including the son being gifted the property.
Let’s start with your priority – staying in your home for the rest of your lives while trying to accommodate the wishes of your family in a fair manner.
Under a right of residence, your son, as the new owner, could technically rent out other rooms in the house
There are two ways of doing this and each has separate tax implications. You can either retain a “right of residence” or have an exclusive “life interest”.
Life interest does have its uses but it is not something usually relied upon in the circumstances you outline, so I am going to leave that to one side – apart from noting that a life interest means that you own that property for your life while a right of residence means that you have the right to live there but you do not own it.
And you do not have exclusive rights to the property. As I understand it, under a right of residence, your son, as the new owner, could technically rent out other rooms in the house though you’d hardly expect that to happen within a family.
In headline terms, your son would be gifted a property with a current market value of €600,000. In other circumstances, this would have tax implications for him as the maximum a child can receive from their parents is currently €335,000. With a capital acquisitions tax (inheritance or gift tax) rate of 33 per cent, that would be a bill of almost €86,500.
However, your son would be able to claim a deduction in the capital value of the property for tax purposes. This is where it can get very finicky.
The law – the Capital Acquisitions Tax Consolidation Act 2003 – provides tables to allow you calculate the capital value of a life interest. What that value is depends on the ages of you and your wife, your gender and the fact that you will require the right of residence to be in place until the last of you dies.
But, as a general rule of thumb, the Revenue Commissioners say they will value the right of residence at 10 per cent of the value of the property.
In this case, that means the gift of the property to the son will be valued for tax purposes at €540,000, not €600,000. The tax bill to the son is still a not inconsiderable €66,600.
He will have a further tax bill to pay when you, his parents, both die on that 10 per cent of the value of the property he now enjoys having full vacant possession and rights of use/disposal. But the advantage, to him, is that it will be 10 per cent of the current €600,000 market value, not any higher market value at the time you and his mother die.
Depending on family circumstances – primarily the strength of personal relations between your children – there is an argument for keeping things as they are
Finally, from your own perspective, it is worth noting that, if you have a right of residence, it will be you, not your son, who will be responsible for local property tax while you are living there.
The second issue is the payment by your son of €80,000 to each of his five siblings to reflect their loss of any interest in the asset – i.e. the family home. Again, how that works out will be determined by how this is organised.
Depending on family circumstances – primarily the strength of personal relations between your children – there is an argument for keeping things as they are currently and simply leaving the house to all six siblings and allowing the one son to buy the others out when they inherit the property.
Given the current value of the property, even if it rises over the intervening years, it is not likely to exceed €2 million – the cumulative value of the €335,000 on inheritance tax for six children inhering from a parent.
At that stage, the son who intends living in the property can simply pay each sibling the market value of their share in the property. There is no capital gains tax because it is a principal family home and, hopefully from their point of view, there will not be enough time for the property to increase in value between the last of you two dying and the brother buying out his siblings, for any further substantial increase in value.
The downside for the son buying out his siblings in that scenario is that it will cost him more than €80,000 a head unless the property crashes in value.
Even now, a property value of €600,000 presumes a worth to each of the six siblings of €100,000, not €80,000. Assuming the property rises in market value, that figure will also increase.
Also, you are relying on no sibling frustrating the arrangement. It really depends on your family’s dynamics but I spend a lot of time dealing with queries of families at odds, particularly over “understandings” regarding inheritance rather than legally-watertight wills.
Of course, if your son sells his home and moves into the house with you for at least three years before inheriting – assuming he has no interest in any other property – then he could inherit free of inheritance tax under the dwelling house exemption, provided you arrange for him to do so exclusively in your will. But there is still the issue of the other five children.
If you do decide to proceed on the basis outlined in your question, there is a tax issue for the son being gifted the home. As mentioned above, the €80,000 payment to each of his siblings is shy of the €100,000 per one-sixth share of the property.
If structured as a gift to all six, with a proviso that the one son buys out the others now at €80,000 a share, he will be deemed to have received a gift from each of his five siblings of €20,000 – or €100,000 in total.
As the lifetime tax-free threshold on gifts between siblings comes under category B of the capital acquisitions tax structure, the benefit he can receive from them in aggregate is limited to €32,500. Even assuming he has never received any gift over the value of €3,000 or any inheritance from a sibling, a grandparent, an aunt or an uncle, he will have a tax bill to pay on the €52,500 “gift” from his siblings.
Why €52,500 as against €67,500 – the amount in excess of the €32,500 limit? Well, he would also be entitled to relief on the first €3,000 excess from each of the five siblings under the small gift exemption, which would be an additional €15,000 reduction in the amount liable to tax.
That will leave him with a tax bill of €17,325.
And it could be worse. In the absence of a watertight legal agreement tying the payment to a surrender of claim to a share in the family home – if that can even be done – the entire €80,000 to each could be seen as a gift to each of them. That would see the siblings, who are already losing out on inheriting a share of the family home, facing their own tax bills.
As you can see, this is not a straightforward exercise. It is fraught with the potential for strife
Again the amount they can receive from their brother tax-free is limited to €32,500 under category B in line with the conditions listed above – plus the €3,000 small gift exemption.
That means, for each, they will be getting €44,500 in excess of their tax-free threshold form the brother under the arrangement. that would leave them with tax bills of €14,685 each, or €73,425 between the five of them.
As you can see, this is not a straightforward exercise. It is fraught with the potential for strife. For your own peace of mind – and the avoidance of any misunderstanding or dispute down the line – it is important that you consult both a tax adviser specialising in succession and property issues and also a solicitor.
Yes, this will cost but it could be a price well worth paying given the potential for discord if there is any confusion in any final arrangement.
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. No personal correspondence will be entered into.