Unravelling tax bill on a property bought in stages

Q&A: Dominic Coyle

We have a property in Cork, which I bought with my two brothers in 1994 for £182,000. I lived there between 1996 until 2006. In 2004, I bought out my brothers. The property has been rented out ever since I moved.

I am looking at selling the property in the next few years. It is now worth around €390,000. A friend advised that if I lived there as my principal residence, I could offset CGT at 33 per cent against the sale and save some money. Clearly it is not my principal residence but if we returned to live there for a period of time, would that reduce the capital gains tax and how long might we need to reside there to obtain a benefit from doing so – tax wise ?

Mr C.D., Cork

* Nothing is ever simple when it comes to tax. And that will not have been helped by a fundamental error I made in the original version of this article that appeared online.

The issue for you here is that you pay capital gains on the period during which it was an “investment” and not for the period when it was your main home – your principal private residence.

You bought in 1994, lived there for about 10 years and will have owned the property for over 28 years, assuming you sell in 2022. Bear in mind Revenue will want to know which month you bought and sell in; they don’t just round up to the nearest year.

But is this further complicated by the fact that you have only owned a third of the house for the whole of this time; the other two-thirds you have only owned for 18 years (to end-2022)?

Not really. And this is where I made a fundamental mistake in the original publication. Under subsection 1(a) of section 604 of the Taxes Consolidation Act 1997, “the period of ownership where the individual has had different interests at different times, shall be taken to begin from the first acquisition”.

I was further complicating matters by breaking your ownership of the property into fractions and assessing tax on the increase or otherwise of various shares of the property over the period you actively owned them. As you can see, the law is very clear, when you accumulate shares in a property over time, the date you originally bought part of it is the date at which all ownership is deemed to start for the purpose so capital gains tax.

So, for capital gains tax purposes, the fact that you only acquired some of the property in 2004 is irrelevant. Your capital gains tax bill will assume ownership from 1994. And, for what it is worth for others to whom it may apply, it does not matter whether or not you end up owning the entire property.

Of course, the actual price you paid for each of the tranches likely differed and this will affect the final bill.

So let’s put figures on this and see if it makes sense.

First things first. let’s see what the tax bill would be if you had bought the entire property back in 1994 by yourself. You bought in punts and will sell in euro so we need to harmonise that. Dividing the £182,000 by the punt-to-euro conversion factor of 0.787564, buying the full property back then would have cost you €231,092.

Then, you need to allow for inflation – at least up to the end of 2002 when such a practice was stopped by the government of the day. To do this, you need to consult the capital gains tax table of indexation multiples – found at https://iti.ms/2Y6QLDR – which shows that a property bought in April 1994 has a multiple of 1.309.

On that basis, your €231,092 property price becomes €302,507 and that is the new base price for the purposes of assessing capital gains

At a sale price of €390,000, you would have a capital gain of €87,493. We’ll make an allowance for deductible expenses (which we explain below) of €10,000. And, finally, you have an exemption of €1,270 in any given year, so you would be paying tax on €76,223 at 33 per cent, which means a tax bill of €25,154.

Part-owner

But, back in 1994, you were acquiring just one-third of the building. So the cost to you was £60,667. And, using that punt-to-euro multiplier, the euro price of your purchase was €77,031 in euro.

Allowing for inflation, that 1.309 multiplier gives you a new base price of €100,833. This is the price you use in assessing your capital gain on the one-third share.

We move on to 2006. I don’t know what you paid for that (you’ll need to have that detail obviously) but, for the purpose of the example, let’s assume the house was valued in 2004 at €350,000. That means you would have paid €233,333 to buy out the brothers (Before you ask, there is no indexation on that purchase price as indexation relief disappeared at the end of 2002).

Adding the €100,833 and the €233,333, the property has cost you €334, 166. With a sale price of €390,000, your capital gain is actually €55,834.

Of course, Revenue will need evidence of the 2004 buyout and be satisfied that any tax bill your brothers owed was paid but those are details.

Anything else you can further deduct from this €55,834 gain?

Well yes, maybe. Certainly you can deduct any costs incurred in buying the house (legal and estate agent fees if any). You can also claim any costs incurred in selling the property – again legal and estate agent fees are the biggies.

Thereafter, if you carried out any works that enhanced the value of the property, they, too could be deducted, but you’ll need receipts etc.

Let’s assume you have deductible expenses of €10,000. That brings your capital gain down to €45,834.

But, of course, tax is not due on all of that as you are exempt for the period when you actually lived there, using it as your main home.

This brings us back to that heads up that Revenue deal in months, not years, and not fractions of years. So we need to work out how many months you used the property as a main home and for how many months it will be considered by Revenue to be an investment.

Investment

We will assume that that the property was bought in April 1994 and will be sold in December 2022. That is a total of 345 months. Again, we don’t have the precise details, but let’s assume you lived there yourself between October 1996 and August 2006. That means the period for which this was your principal private residence was 119 months.

The final year of ownership counts as principal residence regardless of whether you live there or not, so that is another 12 months that fall out of the tax net. So, of the 345 months you owned the property, you are deemed to be exempt on tax for 131 months (the 199 plus the last 12).

So you are exempt on tax for 131/345ths of the capital gain, and liable for tax on 214/345ths.

So what is 214/345ths of €45,834? It’s €28,430.

As the capital gain is calculated pro rata, you could lower the bill by moving back in for a couple of years and increasing the proportion of ownership that is accounted for by it being your main home – though, if your mind is set on selling, that might sound like too much hassle.

You still have to deduct that annual exemption of €1,270, so your final taxable capital gain is €27,160.

Capital gains tax is charged at 33 per cent, so your final tax bill will be €8,963.

Remember, if you have previously sold assets here at a loss and not yet used those losses against subsequent gains, then you still have those to offset against this transaction.

If, of course, you only paid the brothers two-thirds of the original 1994 value in 2004, things get more tricky. Not only will your CGT bill be bigger (€25,154) but you could well face a gift tax (capital acquisitions tax) bill for the “discount” your brothers gave you.

* This article was edited on April 28th, 2020 to correct mistakes in the calculation of relevant capital gains tax.

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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