Can we transfer daughter’s share in one of our properties to another without tax issues?

Q&A: Newly acquired property seems a better fit for her working life than the one we all bought together a few years ago

A few years ago, my husband, my daughter and I purchased a property together (Property A). My daughter was living in Property A until the pandemic began, and her company told her she had to work from home. Property A was unsuitable for working from home, so she moved back into our family home with us.

Property A has since been rented out.

My husband and I recently bought another property (Property B). We were planning on using this as an investment property. However, seeing as Property B is new, better laid out and in a similar location as Property A, we wondered if this would be a better choice for our daughter.

We are trying to see what the options might be here. For example, would it be possible to transfer our daughter’s share of Property A to B? We would like to have an idea of potential legal and/or financial issues that might need consideration before moving forward.

READ MORE

Ms J.S., email

It sounds to me like you are hoping it is possible to simply swap your daughter’s share in Property A for a similar share in Property B. Unfortunately, that is not how it works.

On the legal side, there are unlikely to be any significant issues, as far as I am aware, though I’m no lawyer. There will be paperwork as there are property title issues to be addressed but that should be fairly routine.

The situation on the tax side is likely to be more, to use a word, taxing.

Essentially, what will be happening here is that your daughter is relinquishing ownership of an asset and then purchasing or being gifted ownership of another asset.

Given that she has been part-owner of Property A for a number of years, it is highly likely that the value of that property will have risen, giving rise to a potential claim for capital gains tax.

From what you say, it appears the property was your daughter’s main home for some years before it was rented out sometime during or since the worst of the pandemic. As her principal private residence, she would have been exempt from capital gains tax. However, she will have a liability for the period it was rented out as it then became for her an investment property – much as it had been for you and your husband from the outset.

Given the timings, it is likely that she has been renting it for no more than 2½ years to this point. How much capital gains tax is due from her depends on the increase in value, her share of the property and the proportion of her ownership during which it was rented.

Then there is the actual transfer. There are two likely options here. Either she is selling her share of Property A to you and buying a share of Property B, or she is gifting you the share of her existing property and you are gifting her the share of the new one – or some combination of these. The important thing to be aware of is that they have different implications.

If she sells the stake in Property A at its market value, she has only capital gains to worry about while you will likely have a stamp duty bill between you and your husband.

She can either use that money to buy whatever stake it will give her in the new property or buy a similar stake as she had in the first arrangement which, depending on the respective property values, might cost more or less. That might trigger a capital gains issue for you and your husband but as the second property is only recently acquired this would be very modest if it exists at all. Your daughter will have a stamp duty charge on the value of her share in the new home.

If you simply try to gift the shares in the respective properties to each other, things could get messy taxwise.

Both sides still have the capital gains tax and stamp duty issues, but you are also raising the issue of capital acquisitions tax – or gift tax as it is sometimes known.

The problem arises because the amount you can receive from your living daughter as a gift before paying tax is far less than she can receive from you.

She can take a gift of up to €335,000 from her parents over and above a €6,000 small gift exemption (€3,000 from each of you) but unless she has died, you are limited to receiving a gift of €32,500 from her – on top of the €3,000 small gift exemption each of you can receive from her.

While the gift of a one-third stake (for example) in this new home would not bring her above her tax-free threshold, her gifting of her take in the first home to you and your husband would, it seems certain, trigger a tax charge for each of you – at 33 per cent on any value above €35,5000 (including the small gift exemption) for each of you.

It would also reduce what your daughter could receive tax free from you and your husband at a later stage, including by way of inheritance. That could clearly be an issue as your assets will amount to at least the family home, one of these properties and whatever share you and your husband retain in the one you intend her to now live in.

Another option is that you could always retain the current ownership structure of Property A, with her receiving her share of its rent and she could rent Property B from you and your husband, although this clearly would be an ongoing cost to her.

Or you could leave Property A as it is and “gift” her the share in Property B – within her tax-free threshold – while amending your wills, if necessary, to adjust what any other children receive in inheritance to allow for this “early inheritance” by this child.

As there are two-way swaps here in what you propose, it seems to me best to organise it by way of sale of the respective shares in the properties but I think it would be sensible for both sides to get some tax advice before doing anything.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice