I’m giving my son a €490,000 property. Can I cut tax bill by giving part of it as a loan?

Q. I want to give my €490,000 investment property to my son. I’ve read it’s possible to use my capital gains tax bill on the transaction as a credit to reduce his capital acquisitions tax bill.If I give just part of the value of the property to him, with the remaining €290,000 repayable as a loan, can I still get this tax credit?A. Transferring the property in a part-gift, part-loan arrangement works legally, but it may not be the most tax efficient option, says Carl Donnelly, head of tax at accountancy firm Cronin.“You may end up paying more in total tax than if you made an outright gift,” says Donnelly.READ MOREIn transferring the property to his son, the father will be liable for capital gains tax (CGT) as though he were selling it at its full market value of €490,000. This is regardless of whether the transfer is, in part, structured as a loan, says Donnelly.“CGT of 31 per cent is due on your whole gain, whether you make an outright gift or a part-gift,” he says.The father is right. The law will let him use the CGT he owes as a credit against any capital acquisitions tax (CAT) arising for the son. This is because both taxes arise on the same event and the same property, says Donnelly.A part-gift still qualifies for this offset. However, Revenue practice is to only give credit for the share of the CGT that relates to the gift element – €200,000 in this case.“That amounts to 200/490ths of the CGT he owes on the property,” says Donnelly.Also, the credit cannot be more than the CAT the son might owe on the “gifted” element of the property, says Donnelly.[ Landlord? Self employed? Got deposits abroad? Tips to save money this tax yearOpens in new window ]A child can receive up to €420,000 tax-free from his parents before CAT of 33 per cent kicks in. This threshold is cumulative, so it is reduced by any earlier gifts or inheritances from either parent.Provided the son has enough of his parent-child tax-free threshold unused, a €200,000 gift creates no CAT liability for him at all, so the credit has nothing to reduce and goes to waste, says Donnelly.“The father’s CGT bill stays the same.”Gift the property outright instead, and the son would have received €67,000 over this tax-free threshold, factoring in the annual small gift exemption of €3,000.[ Marrying after retirement will deprive spouse of survivor’s pensionOpens in new window ]CAT on this at 33 per cent is €22,110. The full CGT paid by the father could be set against it.“If the father’s CGT is €22,110 or more, the son pays no CAT at all,” says Donnelly.If the family goes the part-loan route, however, each write-off above the €3,000 annual small gift exemption is regarded as a new gift that uses up the son’s threshold, he says.“No CGT arises on a write-off so there is no credit to off-set it against.”If the loan is interest-free, the interest the son would otherwise pay also counts as a gift to him each year, although the €3,000 annual gift exemption may cover it, he says.If you are doing a loan, make sure it’s documented with clear repayment terms, Donnelly advises.[ 100 Irish websites for Christmas presents, from painted chocolates to ‘panoramic socks’Opens in new window ]Overall, the part-gift, part-loan route works legally, but it may not be the most tax-efficient route.“For many parents, an outright gift is the better choice because it puts the full CGT credit to use. But the right answer for you depends on your actual gain and your son’s prior gifts, so I’d recommend getting the numbers checked by a tax adviser before you go ahead.”The family should also be aware that if the son sells or otherwise disposes of the property within two years, the CGT credit is withdrawn.The son will also have to pay stamp duty, charged on the full €490,000 market value, not just the gifted part. For a residential property, the rate is 1 per cent.The name of the reader who submitted the question is not being published to protect the identities of those involved.Please send your legal queries to Joanne Hunt, Ask the Lawyer, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to joanne.hunt@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice.