Whether to gift investment property now to my child or when I die?

G

goldenfolden

New Member
Messages
2
Hi,

I am currently in my 70s and my son in his early 30s. I have a pre63 property in Dublin but it is turning into a lot of work for myself to keep looking after it. There are 9 units in the property and there is always something to do, whether it's small refurbishments when tenants leave, problems with the plumbing, disputes between tenants etc. My son tries to help when he can but he has his own career and works long hours. My son has no property at the moment and can't afford a house in Dublin with the prices.
The property is taking in close to €100k per year and is my pension. Similar houses in the area are selling for approximately €1.3m. I bought the house in the early 90s for £130k and there is €200k of a mortgage left on the property. If I sell the property now (option 1) I will pay CGT and my son will have to pay CAT on that too when he inherits it.
I was thinking about gifting the property to my son now (option 2) and he can sell it which would mean he would only be paying CAT. With the money left over he would have a decent deposit for a house and could buy 2 apartments which could be rented out. I would then take the rental income for myself which I could use as my pension. I do trust my son 100% and him giving me the monthly rent would not be an issue. Would you be able to advise on any alternative options or problems that may arise with this situation. I would like to give my son some money as a deposit and also have some rental income.

OPTION 1 OPTION 2
Sale price €1,300,000 Sale price €1,300,000
Deduct mortgage - €200,000 Deduct mortgage - €200,000
Purchase price - €163,000 Taxable gain €1,100,000
Taxable gain €937,000 Sons CAT threshold €335,000
CGT @ 33% €309,210 CAT@33% €252,450
Remaining €790,790 Remaining €847,550

Sons CAT threshold €335,000
Taxable €455,790
CAT @33% €150,410
Remaining €640,380
 
A gift is a disposal for CGT purposes so you end up with CGT anyway.

Also, the mortgage isn’t deductible for CGT purposes.

The purchase price can be indexed for inflation and you may have enhancement expenditure over the years plus you would have had indexable acquisition costs (legals, stamp duty?) and if you sell disposal costs (estate agents, legals, etc).
 
The mortgage has nothing to do with the CGT calculation

The gain = selling price - purchase price (indexed up it it was purchased before 2001)
 
For 1991/1992 (the old 5 April tax year), indexation is about 1.4.

Let’s assume you spent £10k on acquisition costs and €50k enhancing the property over the years, and selling it costs you €20k.

That probably brings your total deductible costs to around €300k with indexation, give or take.

CGT of around €330,000 arises on a gain of €1m, i.e. (€1.3m - €300k) x 33%

You then gift the net €950k to your son - He pays 33% x (€950k - €338k), or €202k.

So there’s €748k-ish left in the pot.

And the rental yield on these apartments is may not be as good as your 7.7% on the current place, nevermind the lower capital sum.

Versus keep it until death, when the CGT disappears, and he then gets (€1.3m - €335k) x 33%, or €982k.
 
It is also possible to offset CGT against CAT when they arise from the same event in relation to the same property. So a gift of the property to your son would trigger your estimated €330k CGT bill, which would eliminate his €317k CAT bill, giving the family a net €970k, but the obvious problem is funding the tax because he end-up with the property and you end up with a €330k tax bill.
 
Just trying to be creative here....
Could you borrow a relatively small amount, and convert 2/3 of the units into a nice penthouse apartment? Your son could live there on a caretaker/manager basis until he eventually inherits the whole building.
 
I am not a tax expert, but this is how I see the transaction in response to the question in your heading:

(I am leaving out indexation for simplicity. The principle is the same.)

1685514798449.png
So, on this transaction alone, it costs about €50k extra to give a gift rather than leave on death. That is not a material sum in the overall context of things. If property prices increase between now and when you die, the increased value becomes subject to more CAT if you own it. However, if you son uses the proceeds to buy a home, the increased value is exempt from taxes.

If you are also leaving him other assets on your death e.g. your family home, he will use up the CAT threshold on the other assets, so his CAT liability on this property less the mortgage would be €363,000 - so it makes even more sense to gift it to him now. ( I think that there is a small flaw in my calculations but it does not affect the overall decision.)
 
Last edited:
goldenfolden said:
With the money left over he would have a decent deposit for a house and could buy 2 apartments which could be rented out. I would then take the rental income for myself which I could use as my pension.
Click to expand...

I don't get this. If your son owns the property, he will be taxed on the rent he receives. If he then gifts this to you, you will pay CAT on it as a gift from your son. So this does not work.
 
If it suits your son to live in the property, then that would be a possible solution. Let him live there rent-free. The rent not received would be a gift but I don't think that Revenue pursues this in practice. Others will know.
 
How about you selling the property to your son for €600k?

1685515626620.png
Now, your son owes you €600k.
He sells the property and repays the loan.

I suppose that instead of repaying the loan, he could buy an investment property and use the net rent after tax to repay the loan. But I am not sure why you would complicate it like that. Why does he not repay the €600k to you and you buy an apartment in a block and give it to a management company to manage?
 
goldenfolden said:
I am currently in my 70s and my son in his early 30s. I have a pre63 property in Dublin but it is turning into a lot of work for myself to keep looking after it. There are 9 units in the property and there is always something to do, whether it's small refurbishments when tenants leave, problems with the plumbing, disputes between tenants etc. My son tries to help when he can but he has his own career and works long hours.
Click to expand...

This is the key issue. You should get rid of the property as it's too much hassle. And when a property like this is not managed properly, tenants stop paying rent and the property deteriorates.

This is more important than hanging onto it until you die for the tax efficiency of avoiding CGT.

The second key issue is that if you gift it to your son, either in full or by selling at less than market value, he will get a credit for your CGT against his CAT and so will pay no CAT.

The third key issue that any increase in the value of your son's home will be exempt from CGT, so again it makes sense to do it now. But the non-tax values of owning a home are also important and so doing it now is key.
 
The most tax-efficient way is to gift him the property in full.

But if you need an income, then sell it to him at a reduced price.

Brendan
 
I don't disagree with any of these analyses, but capital taxes are only one element. Will OP still be paying top rate income tax after depriving himself of this income? Because his son will certainly pay top rate tax on the rent. That calculation needs to be made to inform his decision.
 
Brendan Burgess said:
How about you selling the property to your son for €600k?

View attachment 7524
Now, your son owes you €600k.
He sells the property and repays the loan.

I suppose that instead of repaying the loan, he could buy an investment property and use the net rent after tax to repay the loan. But I am not sure why you would complicate it like that. Why does he not repay the €600k to you and you buy an apartment in a block and give it to a management company to manage?
Click to expand...
Thanks for the detailed reply. Would there not be some type of penalty for selling the property for below market value?
 
goldenfolden said:
Would there not be some type of penalty for selling the property for below market value?
Click to expand...

1) From your point of view, you will pay CGT based on the market value and not the selling price.

2) From your son's point of view, the difference between the market value and the selling price will be treated as a gift.

Brendan
 
You must log in or register to reply here.
Back
Top