Good time to transfer your home??
The fact that real estate values are at their lowest for many years got me thinking as to what the positives of this situation may be? And I thought that now is a good time to look at transferring properties to the next generation. It would be wise to review the tax implications and decide if this is a good time to depart with scarce cash to the Revenue.
The Government has honed in on the fact that a lot of revenue can be made from property inheritance tax due to the massive growth in the number of second homes and investment (houses bought to rent out) homes which were bought over the last 15 years.
Estimates put the number of second properties over 300,000 and this doesn’t take into account the number of holiday homes bought overseas.
There are three different taxes when speaking about transferring wealth from one generation to the next – stamp duty, capital gains tax and inheritance/gift tax.
Stamp duty is payable at 7% on the overall value of residential property being transferred above the first €125,000. A 6% rate applies where it is other than residential property valued in excess of €80,000. The fact that values have fallen by between 40 and 50 per cent since 2007 means there will be a corresponding reduction in the level of stamp duty payable.
If you are transferring property to relatives such as children, nephews or nieces you can also avail of a 50 per cent discount in the level of stamp duties, which means bringing it down to 3.5 per cent for residential property and 3 per cent for other properties.
A child includes a step-child and a child that has been formally adopted under Irish or equivalent foreign adoption law. Your nephew or niece can qualify as your child if he/she has worked substantially on a full-time basis for the relevant period:
1) in your business, trade or profession and the benefit consists of property used in connection with that business, trade or profession and
2) in a company carrying on the business, trade or profession and the benefit consists of shares in the company.
Capital Gains Tax is payable at a rate of 25 per cent on the increase in value between the time of purchase and the date of disposal, but allowances are made for inflation.
An owner giving a gift of property – whether a home or a commercial investment – is for Capital Gains Tax purposes deemed to have disposed of it at open market value and is taxed accordingly. The fact that it is being passed on to a son or daughter does not change this. A principal private residence is exempt from this tax.
With property prices now at an all time low, now would be a good time to transfer these assets and minimise the liability for CGT.
Gift tax/inheritance tax is payable by anyone receiving a gift or inheritance at the rate of 25% on the overall value after a tax-free allowance is taken into account:
€434,000 on inheritances from parents (which is down from €542,544 in the previous year), €43,000 from close relatives and only €21,700 for all others.
There is a little know exception to the rule which provides a way of passing on ownership of a house without paying inheritance tax. The beneficiary must have resided in the house for 3 years prior to the inheritance and not had a beneficial interest in any other dwelling at the time. They must also continue to live in the house for a further 6 years – unless they are over 55 years of age – to avoid any claw-back.
This is also available in a more limited form for gifts, provided the donor is over 65 yrs of age or infirm and the beneficiary was caring for him or her.
Each transfer of assets is different and needs to be looked into individually – as each would have different tax merits or tax pitfalls, so expert advice should be sought.
You should also take into account – most importantly, I might add, your own needs! Have you adequate funds to meet your own needs and those of your dependants? Think this through before considering any of the above.
If you want to retain control of your business until your children are older, you can put voting shares under your control and gift them non-voting shares, or put non-voting shares into a discretionary trust.
If you are in the process of separation or divorce, it is important to tie up property transfers at the time. Otherwise, if you are the spouse who is leaving the family home, capital gains tax accruing to the value of that home after the separation could end up being charged on you, if you are named as joint owner but no longer live there.