I’m transferring a €600,000 house to my two sons: How will tax be calculated?

Q: I want to transfer the title of a house to my two sons as joint owners. The house, which is not the family home, is valued at €600,000. One of them has lived there since 2008. He pays utilities, and the property tax, which is in my name, and has contributed €60,000 to necessary works. He sublets a room under the ‘rent a room’ scheme, so Revenue acknowledges it as his primary residence. Will any of this be considered when calculating his inheritance tax, and how far back will Revenue recognise the €3,000 annual small gift exemption?A: Transferring ownership of the house to his sons as joint owners means both will own it together. If one brother were to die, his share would automatically pass to his surviving brother. READ MOREAs a Group A beneficiary, a child has a lifetime tax-free threshold of €400,000 in respect of gifts and inheritances received from parents, meaning they can potentially receive €400,000 from parents tax-free. In this case, each is receiving half the property, a value of €300,000 each. “If they haven’t received any other gifts or inheritances from their parents, they will not be subject to tax,” says solicitor Marusia Geampana of Coyne Solicitors in Lucan, Dublin.If previous gifts mean the gift of the house pushes them over the threshold, they will pay tax of 33 per cent on the amount above €400,000.The small gift exemption means a child can receive €3,000 a year from each parent tax-free. That’s a potential gift of €6,000 per calendar year from parents that doesn’t reduce the child’s lifetime capital acquisitions tax (CAT) threshold. [ Rising property prices expose more people to ‘significant’ inheritance tax bills, warns adviserOpens in new window ]This allowance applies strictly per calendar year, however, so it cannot be carried forward or backdated to previous years, says Geampana. As one of the sons has lived in the house since 2008, his father may be wondering if the Dwelling House Relief exemption will enable that son to inherit the home capital acquisitions tax-free. Since December 25th, 2016, this relief applies almost entirely to inheritances, rather than gifts like this house – but there is an exception for dependent relatives. It applies if the recipient of the house is permanently and totally incapacitated and unable to maintain himself; or if they are 65 or over at the date of the gift.The recipient must have lived in the house three years prior to the gift, unless mental or physical infirmity precluded this, and they must continue to use the house as their main and only home for at least six years from the date of the gift. If they move out or sell the property before the six years end, Revenue can demand the unpaid tax.[ What tax are we liable for on home we inherited where our mother had ‘right of residence’?Opens in new window ]If the recipient was already aged 65 or older at the date of the gift, or if a doctor certifies that they must move due to illness, this six-year rule does not apply.For tax purposes, the word ‘disposal’ comprises a sale, inheritance or gift – so by giving the property to his sons, the father may also face a tax bill.If the father bought this property for €400,000 for example, and it is now worth €600,000, it is considered that there is a capital gain of €200,000. Legal fees paid to buy the house and to transfer it to his children, and the cost of any alterations, could be deducted from the gain, says Geampana. The rest would be taxed at 33 per cent. But by gifting the property during his lifetime to a child, any capital gains tax paid by the father can be used as a credit against the child’s CAT liability on the same property, says Geampana. That’s provided the house isn’t disposed of by the sons within two years, starting from the date of the gift. Depending on how and when the €60,000 on works was spent by the son, he may be able to claim a credit against any capital acquisitions tax arising, or if he eventually sells the house, he may be able to claim it against any capital gains tax then, she says. 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.