You dodge capital gains but your son faces a big tax bill

In 2016 my wife and I gave our son (an only child) €300,000 towards the purchase of his house. This is the only gift he has received to date.

We also have a rented house which we purchased in 1979 for €120,000. Over the years, we have spent approximately €114,000.00 in renovation cost (however we have receipts for only €86,000). The house is now worth €450,000.

If we transfer this house to our son now, will we be liable for Capital Gains Tax and will he also be liable for Capital Acquisition Tax?

In addition, we have the family home which will also be his. If this is left to him in a will, will our estate be liable for Capital Gains Tax and will he be liable for Capital Acquisition Tax on this also?

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Mr T.M., email

Capital gains and capital acquisitions are two entirely separate tax heads and, as I can see you suspect, exposure to one does not rule out liability to the other.

The good news, as far as I can see, is that you will not have to regret mislaying receipts for work done on your rental property.

I am assuming that you have already done the conversion from punts (the currency du jour back in 1979) to euro.

Looking first at capital gains, you are liable for tax – outside of a small exemption – for any capital gain you make on the sale of an asset other than the family home.

As this second property was an investment, rented from the outset, you will have been liable down the years for income taxes on the rent and, in the normal course of events, would be facing a significant capital gains tax bill on its sale.

If you had bought the property in 2002 at that price and sold now at its current value, you would be looking at a tax bill of €110,000 before expenses.

However, back in 1979, the Revenue had an indexation system in place to adjust the purchase price each successive year to allow for inflation. It ran until 2002 when it was abolished by then finance minister Charlie McCreevy.

The good news for you is that a property worth the equivalent of €120,000 in 1979, would have a new “indexed” purchase price of either €449,040 or €497,760 by 2002 – depending on whether you bought before or after April 6th in 1979.

As the current value is €450,000, there is effectively no capital gains: there might, in fact, be a capital loss.

On your own home, as I mentioned, there would be no capital gain if you sold during your lifetime. If it passes under your will, that remains the case. As it happens, capital gains die with you, so there is no capital gain on an estate after one dies.

That’s you sorted. Unfortunately, your son will have a substantial capital acquisitions tax bill on both transactions.

He has already received a gift of €300,000, just €35,000 short of the increased exemption threshold announced in Budget 2020. The transfer of the €450,000 investment property would leave him facing a tax bill of over €138,000 – 33 per cent of everything over the €335,000 lifetime limit.

Were he to inherit the family home later, he would be liable to capital acquisitions tax of one-third of its value as well.