When a parent or both parents own land and are considering transferring a site to a child to allow the child to build his or her principal residence they should be aware that it may give rise to a number of taxes. However, there are favourable tax consequences when transferring a site to a child.
The relevant taxes are:
- Capital Gains Tax (CGT) – on the parent making the transfer of the site;
- Capital Acquisitions Tax (CAT/Gift Tax) – on the child receiving the site; and
- Stamp Duty – again, on the child receiving the site.
CAPITAL GAINS TAX (CGT)
CGT is a tax charged on the capital gain (a profit) made on the disposal of any asset. It is payable by the person making the disposal not on the person receiving the property i.e. in this situation the parent transferring the site to the child. The gain/profit is the difference between the price paid for the site when it was originally acquired and the price you sold it for. In the contest of transferring a site from a parent to a child the gain/profit in this situation will be the difference in the value of the site when it was acquired by the parent and the value of the site on the date that the site is being transferred. The current rate of Capital Gains Tax (CGT) is 33%. The first €1,270 of your gain (after deducting losses) is exempt from CGT.
If you transfer land to your child to build a house which is your child’s only or main residence, you will not have to pay CGT on the transfer. For this purpose, a transfer includes a joint transfer by you, and your spouse or civil partner, to your child.
To qualify for relief, the land must:
- be one acre or less
- have a value of €500,000 or less
Your child may pay CGT on the disposal of the land from you to them in two specific situations. These are where they dispose of the land either:
- without having built a house on that land
- if they have built a house on the land, having not occupied that house as their only or main residence (this must be for a period of at least three years).
This rule does not apply if the child disposes of the land to their spouse or civil partner.
CAPITAL ACQUISITIONS TAX (CAT/GIFT TAX)
Capital Acquisitions Tax (CAT/Gift Tax): the child receiving the site should not be liable to pay Capital Acquisition Tax but it will depend on the value of the site at the date of the transfer. Capital Acquisition Tax may arise when a person receives a gift of a site that exceeds a given threshold. A threshold is the amount a child is allowed to receive as a gift from a parent without having to pay tax.
A child’s threshold when receiving a gift from a parent is currently at €320,000. If the value of the site is above €320,000 the child would be liable to tax at a rate of 33%. Previous gifts received would also be taken into account.
Stamp Duty: The rate of stamp duty is 6% in relation to non-residential property.
GIFTS AND INHERITANCES BETWEEN SPOUSES
Revenue Commissioners take the view that notwithstanding the provisions of Section 127 of the Finance Act, 1990 (i.e. gifts and inheritances between spouses are tax exempt) there are circumstances where a charge to CAT may arise in a gift between spouses, or as a result of a prior gift between spouses.
Section 8 of the Capital Acquisitions Tax Act, 1976 provides where a donee takes a gift from a disponer and within three years a further disposal of the gift takes place the beneficiary of the second gift is deemed to take the gift from the original disponer.
For example, if a parent gives property to his son who subsequently transfers the property into joint names of himself and his spouse within three years of the first gift, the Revenue Commissioners have made it clear that they may regard this latter transaction as a gift between parent-in-law and daughter-in-law, to the extent of half the property.
Furthermore, if a wife gives property to her husband, who subsequently transfers the property into the name of his parents within three years of the first gift this latter transaction would be deemed to be a gift between daughter-in-law and parents-in-law. Section 8 only applies to gifts and is an anti-avoidance provision. To avoid the provisions of Section 8 one must await the elapse of the three year period.
If a parent transfers property to a married child and within 3 years of the transfer that child wishes to raise a mortgage on the property. Section 8 (2) of the Capital Acquisitions Tax Consolidation Act provides that where a gift is taken by a married child of a disponer (1st Disposal) and consists of a house/site and that child wishes to raise a mortgage and discovers that the lending institution, as a requirement for the mortgage, demands the property is placed into the joint names of the child and their spouse (2nd Disposal), provided adequate evidence is furnished to Revenue proving the transfer into joint names was at the insistence of the lending institution there will not be any Capital Acquisition Tax due in relation to the 2nd disposal of the property.
Please do not hesitate to contact us should you have any questions regarding the above.