High Stakes with Revenue Commissioners

I recently came across a situation where a family decided to purchase a flat near the University College Dublin for their son’s accommodation while he finished his postgraduate studies, with intentions of leasing it afterwards. Six years later, the son still resides there.

There were cautionary advisories suggesting their son may encounter issues with gift tax, given that he’s staying there without paying rent. They wondered how the Revenue could regulate this.

Another query revolved around whether there were any rules when a son wants to financially support his father in buying a property.

The guidance you stumbled upon is entirely correct to some extent. The financial aid parents can offer their adult offspring saw tighter restrictions imposed in 2014 to prevent affluent families from exploiting these for substantial or complete lifestyle funding for their grown-up children in a tax-savvy way. Posh houses, luxury cars and high-end holidays were often bankrolled by a few individuals, which the Revenue deemed as flat-out tax evasion.

Therefore, letting their son live in an apartment rent-free definitely puts him at risk of capital acquisitions tax evaluation.

Nevertheless, there is a part of his occupancy in the apartment that is exempted. The Capital Acquisitions Tax Consolidated Act 2003’s Section 82 – which pertains to this matter – was modified by the 2014 Finance Act, declaring any financial support provided by a parent, during their lifetime, for their children’s sustenance, education or proper upbringing, to be exempt from scrutiny provided the child was either underage (i.e. below 18), between 18 and 25 but still studying full-time or incapacitated due to physical or mental illness to fend for themselves.

So, the flat provided by this couple for their son’s stay during his studies comes under this exemption.

However, the son is liable for assessment for the four years post his studies. The expected typical rent in that area is the liability amount.

As the son is accountable, he must inquire with local estate agents about the prevalent rent for similar apartments in that part of the town at the time he wrapped up his studies. Since it falls under a rent pressure zone, the Revenue will likely consider the rent to have risen within the set limits.

The regulations surrounding rent have become more complex, as the guidelines have been adjusted. Prior to July 2021, the annual rent in rent pressure zones could escalate by 4 per cent. However, from that period onwards, the increase rate was restricted to either the consumer price index or 2 per cent, whichever was less.

After the economic lull caused by the global pandemic, inflation oddly climbed above 2 per cent in that month, as confirmed by the CSO data, despite previously being in the negative. Therefore, 2 per cent can be used as a basis for calculations from then on.

Based on your description, it seems the son commenced his stay in the apartment circa 2018. Consequently, he would have been allowed a rent-free span until the conclusion of summer 2020.

Daft’s third quarter rental report for that year stated that the average monthly rent for a one-bedroom apartment in his Dublin area was €1,890, increasing to approximately €2,200 for two bedroom properties. This data is based on averages, so he would still need to establish the specific rent amounts in his building.

Yet, hypothetically speaking, let’s proceed with these numbers. The new, reduced caps would likely have been enforced when the rent reviews were due, resulting in a 2 per cent increase per year. This takes the cost of a one-bed to €1,928 following the 2021 review, €1,966 in 2022, €2,006 in 2023, and, as of the 2024 review, €2,046. If he’s in a two-bed property, the figures would be around €2,244 (2021), €2,289 (2022), €2,335 (2023) and €2,382 (2024).

Given his one-bedroom rent, he’s likely obtained a rent-free bonus of about €94,470 up until now. This amount could potentially increase to more than €119,000 if he remains in the flat for the next year. Fortunately, he can utilise the small gift exemption on this total. With both parents alive, as per your question suggests, this yields a €6,000 annual deduction, meaning the due amount has been reduced by €24,000 so far, and could be further cut by €30,000 if he continues his stay into the next year.

To date, the financial advantage of the two-bed option stands nearly at €109,000, which drops to €85,000 after accounting for the small gift exemption. This amount is set to increase to €107,400 this time next year, again including the small gift relief.

This represents a notable gain, yet it doesn’t immediately result in a tax bill. The individual has the right to obtain up to €335,000 from his parents via inheritance and yearly gifts exceeding €3,000 from each parent. Thus, even with our higher estimate of €85,000, he still falls significantly below this limit.

Therefore, the individual is yet to do anything wrong. The matter could only arise in future when he receives an inheritance or if he chooses to remain living in the flat for another ten years.

Still, this will diminish the sum he can ultimately inherit tax-free from his parents. Only they, along with him, can decide if his current accommodation requirements make this trade-off valuable.

The figure of €335,000 may increase in the budget, but the offset of €70,470 or €85,000 will persist.

How will the Revenue oversee this? This is another intriguing question.

At the moment, self-assessment is the method for capital acquisitions tax liability, meaning the son (the beneficiary) must monitor it. Presently, he doesn’t even need to inform the Revenue of anything until his benefit surpasses 80% of the tax-free threshold – being up to €268,000 in this case – when he must register a return to Revenue, though no tax is payable until the figure exceeds €335,000.

However, failure to submit an accurate return when he does become liable could potentially be a criminal offence, potentially leading to complications for him, his family, and his employers. The Revenue may be able to connect the dots, possibly not now but potentially in the future. They have access to vast amounts of data and increasingly efficient computers for tracing the flow of money.

It’s always wiser to approach them rather than waiting for them to reach out to you. If found to be in the wrong, you could be liable not only for the pending tax but also for any daily interest that has accrued from when it first became due, plus penalties – all this assuming you can avoid a courtroom scenario.

Is it feasible for him to evade this? Potentially, yes. It’s no secret that a large number of families house adult offspring in Dublin in lodgings originally meant for their university years. The major choice he has to confront is whether he is content with the risks associated with this gamble – a choice he only needs to consider when he reaches 80 per cent of the limit.

The Revenue authority has been advocating for all inheritances and gifts to be disclosed, without considering the sum, as long as it has a potential tax element – this includes all inheritances and any gifts over €3,000 from any individual. This is primarily because the current regulations are easily manipulated by conveniently ‘overlooking’ certain details, especially in situations similar to this. If a higher threshold were to be announced in the budget in conjunction with this proposition, it would pose an increased challenge for individuals like this man’s son.

The persistent focus of the Revenue authority on such matter is cause for alarm in and of itself.

Lastly, answering your second query, if the son is donating money to a parent to fund a property purchase, the tax-free threshold in place is the relatively more moderate Category B, tailored for linear blood relatives – €32,500.

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