The conundrum that my son is confronting is rather unusual. His grandmother has recently conveyed to him that she has bequeathed her Dublin home onto him, whilst she has shifted to a care home, possibly under the terms of the Fair Deal scheme. The convoluted part therein lies in the fact that she has passed the keys onto him and wishes for him to rent it out in her stead, keeping the rental yield for himself. Her intent behind this is to provide him with a source of income to offset his own living expenses, as he is currently a student in another part of the country.
Despite having the best of intentions, this could land him in a tangle of intricate tax regulations and gifts legislation. We would be profoundly appreciative of any guidance that could help us in this volatile situation.
Grandmothers are truly a blessing, wearing their hearts heavy with care and concern for their offspring’s financial future, often disregarding the fine print of tax laws. However, the kind gesture of my son’s grandmother might run into a snag if she doesn’t formally transfer the property to my son. In the absence of an official handover, their plan cannot be comfortably executed as the property still legally belongs to her.
Should they venture onto the path of an official ownership transfer, it may activate a Capital Acquisitions Tax that could prompt him to sell the property, and I’m reasonably certain she doesn’t intend for it to come to that. There are also restrictions concerning the value of a gift or inheritance one can receive, scaled on the basis of the familial connection between the giver and receiver. In this case, my son is applicable for a category B exemption as a grandson. This, however, is capped at a fairly moderate limit of €32,500. Any value exceeding this threshold shall be taxable. He could possibly receive a further small gift allowance of €3,000, but that still restricts his tax-free limit to a mere €35,500.
The pension threshold being referred to takes into account any gifts exceeding a value of €3,000 or any inheritances previously received from a grandparent, uncle, aunt, sibling or, fortunate enough to still have them, from great-grandparents. If he is to inherit the property rather than receiving it as a gift, the small gift exemption cannot be used to increase the tax-free threshold.
The Capital Acquisition Tax, levied at 33%, would likely result in a substantial bill for the property gifted from his grandmother – a sum that could easily run into the tens of thousands. Unless he has unusually sufficient funds to cover this, he would be forced to sell the property.
In a scenario where he doesn’t officially own the property, any rent collected from it would technically belong to the owner – i.e. his grandmother. Whether he gets to keep the money is at her discretion. However, if she allows it, it reverts to those tricky Capital Acquisition Tax-free allowances. The money he receives up to €32,500 is tax-exempt for him assuming there are no previous category B gifts or inheritances. However, it is not tax-free for her.
There could be a couple of ways this impacts her. The basic problem is the tax on rental income, which she is obligated to file in an annual tax return since she owns the property. Her decision to hand the rental income over to her grandson does not relieve her from this tax liability.
The other area to consider is the Fair Deal issue. It’s uncertain if she is leveraging this governmental aid to reduce the cost of her nursing home care, but it’s best to presume she is. The support she receives from the state is based on her income, and she is required to contribute 80% of her income to her care expenses. However, during the housing crisis, special provisions were put in place to help nursing home residents make use of their vacant homes. Consequently, only 40% of her rental income, not 80%, would be factored in.
An annual fee of 7.5% applies on savings over a stock of €36,000. A cap of three years is in place for the 7.5% annual fee relating to her residential property. This can be settled via a loan for care home costs, secured against her property, payable on sale or on transfer to your child.
There may be complications if the rental income has already been passed to him.
Likewise, it’s risky if a gift is made to him. Under the Fair Deal scheme, there is a requirement to reclaim any disposables from an individual’s estate over five years. This is to ensure the person is paying the correct amount towards their care needs.
Waiting for an inheritance doesn’t necessarily simplify things, unless substantial savings have been amassed to cover the foreseeable capital acquisitions tax burden.
A seemingly easy resolution would be for him to shift into the property and stay for no less than three years prior to his grandmother’s passing. Assuming he owns no other properties, or share thereof, and is willing to reside inside the property or a house purchased from the total income of a potential property sale, he would be exempt from property tax under the dwelling home exemption.
However, his current studies in a different location might make this option less viable.
Additionally, using the Fair Deal may lead to a repayable loan of up to 22.5% of the property’s value to HSE, possibly resulting in the sale of the house.
In conclusion, this generous act from the grandmother to your son might impose substantial financial burdens on both of them. It is imperative that they fully understand their financial standing and potential tax implications before proceeding.
I wouldn’t advise spending any money on refurbishments, or letting the property, until there is more clarity about the situation.