Potentially high stakes game with Revenue Commission – The Irish Times

I recently read about a case where a family bought a flat near UCD for their son to live in while he completed his postgraduate studies, with the intention of renting it out later. Six years later the son still lives there.

They were advised that the son may have a problem with gift tax because he lives there rent-free. How can the tax office control this?

By the way, are there any laws governing a situation where a son gives his father money to buy a property?

Mr. MB

The advice you came across was absolutely spot on… to a point.

The rules on the financial support parents can provide to their adult children were tightened in 2014 because some wealthy families were abusing them to largely or entirely fund their adult children’s lifestyles in a tax-advantaged way. Houses, cars and luxury holidays were routinely financed by some people, and the Revenue, not surprisingly, saw this as simple tax avoidance.

So allowing your son to use the apartment free of charge certainly exposes him to capital gains tax.

There is, however, an exclusion covering part of his residence in the apartment.

Section 82 of the Capital Acquisitions Tax Consolidated Act 2003, which covers this area, as amended by the Finance Act 2014, provides that “money or money’s value given by an individual during his lifetime for the maintenance, support or education of his children…” is exempt from inclusion, provided the child is a minor (i.e. under 18 years of age), is between 18 and 25 years of age but in full-time education or is “incapable by reason of physical or mental incapacity of supporting himself”.

So a couple who provided their son with a place to stay while he studies will be covered by the exemption.

But he is assessed for the four years since he left school. And yes, the liability is the rent that the couple could normally expect to pay in that location.

As the son is responsible, he will need to check with local estate agents what the rent was in the part of town where he lived when he left university. This will be a rent pressure zone, so Revenue will assume that the rent has increased within the limits available.

To complicate matters, the rules have changed. Until July 2021, rents in rent pressure zones could increase by 4% per year. From then on, the rate of increase was limited to the lower of the consumer price index or 2%.

According to CSO data, after the pandemic-induced slowdown, when inflation was effectively negative, it slightly exceeded 2% this month and has remained at that level to this day, so from that point on, the 2% figure is sufficient for calculations.

From what you say, your son started living in this apartment in 2018, so his permitted rent-free period will last until the end of summer 2020.

According to Daft’s Q3 rental report, the average rent for a one-bedroom apartment in the part of Dublin where he lived was €1,890 a month, rising to around €2,200 for a two-bedroom apartment. These are averages: he will still need to determine the rent levels for his investment.

But let’s take these figures for example. By the time the rent review comes around, new, lower limits will likely have come into effect, so he’s looking at 2 per cent per year. That gives a one-bedroom €1,928 at the 2021 rent review, €1,966 in 2022, €2,006 in 2023 and, at the 2024 rent review, €2,046. If it’s a two-bedroom, the figures are closer to €2,244 (2021), €2,289 (2022), €2,335 (2023) and €2,382 (2024).

Based on a single bed, he will receive rent free benefit of €94,470 approximately now, rising to over €119,000 if he stays another year. He is entitled to small gift tax exemption and given he has two parents (I assume from your query) this works out to €6,000 per year, which reduces his current obligation by €24,000, and by €30,000 if he stays until this time next year.

For the two-bed option, the benefit so far is almost €109,000 (falling to €85,000 once the small gift tax relief is taken into account). That figure will rise to €107,400 by the same time next year, again taking into account the small gift tax relief.

This is a significant benefit for everyone, but it does not mean that he has any real tax bill to pay. He is entitled to receive up to €335,000 from his parents through inheritance and annual gifts above the €3,000 from each parent per year, so even at our higher figure of €85,000, he is well below that.

So he’s not guilty yet. The problem will probably only arise when she inherits his estate – or if she continues to live in the apartment for another decade.

But it will reduce the amount he can ultimately inherit tax-free from his parents by that amount. Only they and he can determine whether his current housing needs make this trade-off worthwhile.

The amount of €335,000 will probably increase in the budget, but the compensation of €70,470 or €85,000 will still apply.

How can the IRS control this? Well, that’s also interesting.

Currently, the tax liability on the acquisition of capital is settled independently, so the beneficiary (the son) has to keep track of it. Currently, he does not even have to inform the tax office about anything until his benefit exceeds 80 percent of the tax-free allowance – so in this case, at least to the budget, €268,000 – at which point he has to declare it as a refund to the tax office, even though no tax is due until the amount exceeds €335,000.

Of course, failure to file an accurate return, if and when he becomes liable, can be a crime that can be quite embarrassing for him, his family and his employers. Revenues can always connect the dots, perhaps not now, but perhaps in the future. They have access to vast amounts of data and computers that are increasingly able to track the money trail.

And having them come to you, rather than the other way around, is never a good idea. If you get caught, you will be liable not only for the tax you owe, but also for daily interest from when it first became due, and penalties – even if you manage to avoid court.

Can he do it? Perhaps. I have no doubt that there are many families in Dublin who have grown children living in places originally designated for college accommodation. He has to decide whether he is comfortable with the risks involved – and as I say, it is a decision he has to make only when he is at the 80 per cent threshold.

It is precisely because he considers the current rules too susceptible to convenient “forgetting”, especially in cases like this, that the Tax Office insists that every gift and inheritance, regardless of the amount involved, be reported to him, provided it is potentially taxable – that is, all inheritances and all gifts above €3,000 from any person. If this were introduced, together with a higher threshold in the budget, it would make things even more difficult for people in this son’s situation.

The fact that the Tax Office is consistently focusing on this issue should in itself raise concerns.

Finally, regarding your second question, if a son gives money to his parent to help him buy a property, the tax-free threshold is much more modest and is €32,500, which is the same as category B for lineal relatives.

Please send your enquiries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2 or by email to [email protected] with a contact phone number. This column is a service to readers and is not intended to replace professional advice