An individual buys – and occupies – a house for say €90,000 in February 1990. Some 25 years later, 2015, due to failing health, the same individual has had to move to a full-time nursing home.
The house is rented out in order to contribute towards the expenses of the nursing home care.
If and when the individual passes on, will the rent period be exempt from capital gains tax because of the forced circumstances outlined above? For the sake of clarification, can you assume the house will have been rented 10 years, and assume it is subsequently sold for say €400,000.
As I understand it, normally the gain would be computed as follows: Estimated sale price (€400,000) minus the indexed cost of €90,000 (multiplied by the index factor 1.503, which equals €135,270). That makes a gain of €264,730.
The chargeable gain would be €42,513 and CGT would be 33 per cent of that figure minus the €1,270 exemption, which equals a tax bill of €13,610.
Assuming the above calculation is correct is there any relief where the circumstances arose out of a medical necessity for an individual to go into a care home.
Mr DN, email
There’s a lot in this and you have most of it correct, but not quite all as far as I can see. First up, bear in mind that if the property is kept until the owner dies, any capital gains tax bill will die with them. So this question assumes the property will be sold while the owner is still alive.
This home has been the person's principal private residence – ie family home – since it was acquired back in 1990. It still is, although the person had to go into long-term nursing home care a few years ago.
In general, a principal private residence is exempt from capital gains tax. This is on the presumption that it is owner-occupied. But there are three important exemptions where you will not be liable to capital gains tax even if you no longer live in the family home.
First, if your employer requires you to live elsewhere for the purpose of your job, Revenue will consider that time to be owner occupation of the property. However, there is a time limit here. You only get four years under this exemption. If your employer wants you to stay in another part of the country for longer than that, the exemption runs out.
The second exemption is where you had to live outside the State because of your job where, in Revenue-speak, “all the duties of which were performed outside the Republic”.
Finally, and much more relevant to your case, there is an exemption for people who are not living in their home because they are receiving care in a hospital, convalescent home or nursing home, or where they now reside in a retirement home for which they are paying.
Unfortunately for you in this case, there is also a significant condition applying to this last relief and it is that the family home remains unoccupied.
I know it sounds daft at a time when we have a housing crisis but if you allow anyone else to occupy the property while you are in a nursing home, it becomes an investment property in the eyes of Revenue. This is why we have swathes of empty properties across the State.
There are about 25,000 people in Irish nursing homes alone before we even consider those in long-stay hospital care. That’s a lot of perfectly good family homes lying unused while politicians and local authorities plead inability to move faster to address an accommodation crisis.
All of which is no good to you. By renting out the house to help defray the costs of the nursing home care, you are making it liable to capital gains tax. And, as we are now in 2020, and this dates back to 2015, I assume the horse has bolted.
We'll come to the calculation in a second, but first I'm not sure why the person (or their family) felt the need to do this. Under Fair Deal, they were entitled to nursing home care at a cost of 80 per cent of their income and 7.5 per cent of the value of savings over €36,000. While the value of the house would be included, it would only be for the first three years (up to 2018), so capped at 22.5 per cent of its value and only payable on its sale after the owner died.
By renting it out, they are effectively paying more for the care than they need to and making themselves liable for a significant capital gains tax bill to boot.
So what about that bill?
From the phrasing of your letter, it is clear that you are quite familiar with how this works. In simple terms, the capital gain is the difference between the purchase price and the sale price.
As you note, because the property was bought before 2002, you can apply an indexation factor to the purchase price as allowed back then to counter the impact of inflation. I assume the €90,000 purchase price is already converted from the original purchase price in punts?
You are also allowed deduct from the gain any costs incurred in buying or selling the property. If money was put into the property to enhance its value – for instance by adding an extension – this might also be allowable as enhancement expenditure though you’d want to have receipts.
I’ll leave that bit to you.
The next bit is to work out for what portion of the ownership the property was an investment and subject to capital gains. As you rightly provide for in your calculation, the final year of ownership is regarded as owner occupation regardless of the actual circumstances. So, if the property was rented for 10 years, you would count nine for the purposes of CGT.
Also, bear in mind, the Revenue Commissioner doesn’t deal in anything as blunt as years; they will want to know precisely when it was bought, when it was rented and when it was sold.
But using our basic example, you have a property sold for €400,000 that was acquired for an indexed value of €135,270. That leaves a gain of €264,730. We’re at idem up to this point.
The house will have been owned for 35 years, of which nine count for the purposes of investment gain but this 9/35ths is calculated off the €264,730, not, as you suggested, the €135,270 purchase price.
That gives a capital gain liability of €68,073, which at a current tax rate of 33 per cent means a tax bill of €22,464 before your €1,270 annual capital gains tax exemption, and €21,194 net of that.
Of course, you can reduce that at a stroke by not renting the property between now and when it is sold. It should not affect the nursing home care but will knock about €10,000 off the tax bill.
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