‘We bought our son a flat in his name but we took the rental income’

Over 20 years ago we purchased an apartment for our son who was intending to go to college in Dublin. In the event, he decided to study elsewhere and we rented out the apartment. We had bought the property in our son’s name but he has never lived there and it has been rented ever since.
We paid the mortgage, property tax, management fees and all associated costs (we also collected the income and declared same each year). We have two other children but we did not repeat the exercise with them as the Celtic Tiger was roaring and property values were ridiculous. The mortgage is now fully paid off.
When we die we wish to leave our wealth to be divided equally between our three children after adjusting for the gift of this property to our first born. (Each will inherit well in excess of the current gift allowance). My question is how should we (or more importantly will Revenue) value this gift? At the purchase price, market value at the time of inheritance or by some other formula?
This may not be relevant but our son has since returned from abroad and now manages the property and receives the income from it.
Mr D.F.
We’re back to the Irish curse of the “informal arrangement” here and it could well rebound on you or your son with Revenue.
I do think you will need to take advice from a tax professional, not on the inheritance side of things but more on the rather contorted arrangement regarding the original purchase and rental arrangements.
If you acquired the apartment in your son’s name then that was a gift to your son at that time. The relevant value would be what the apartment cost when it was acquired. All management fee and property tax payments will also be considered gifts because you were paying them for your son – i.e. on a property that was in his name and for which these charges were therefore his responsibility.
In relation to the purchase and the maintenance fees/property taxes, the relevant threshold would have been the Category A threshold that applied at each date you were making these financial gifts. You’ll need to check back on what that threshold was at the time which you can do here.
As an example, you say you bought this apartment in his name over 20 years ago. Well, in 2004, the Category A threshold was higher than it is now, at €456,438. That had jumped from €441,198 the previous year and from €380,921 in 2020. Getting the right number will be essential in determining whether any part of the gift was taxable.
In terms of the ongoing expenses, people might rely on the small gift exemption to defray at least some of these. That exemption currently stands at €3,000 and means that, today, you and your wife could pay up to €6,000 of your son’s management fees and/or property tax without affecting his lifetime inheritance tax limit.
Divvying your estate up to benefit each of your three children equally is a different matter and, presumably, would involve you setting this costs against what your son has already received.
Like the inheritance tax threshold, the value of the small gift exemption has also changed over time. It amounted to £250 (€317) per person back in 1969 when it was first introduced. You will need to check but I believe it was worth £1,000 (€1,270) when we transitioned to the euro and rose to the current level of €3,000 in 2003. The value of the benefit to your son on having costs associated with the apartment paid on an ongoing basis must be measured against the rules in place at the time.
There was, of course, from 2003 at least, a dwelling house exemption which was used by those fortunate enough to have the financial wherewithal to buy homes for their children.
It allowed an adult child to inherit or be gifted a home without inheritance tax liability where they had lived in it for three years before taking ownership, stayed there for another six years and owned no other properties. Those were the basic terms: the legislation did allow for some wriggle room but that’s not relevant here.
The rules did vary from time to time – before 2016 any time the owner lived in the property did not count towards the pre-gift occupancy of the recipient; after 2016, the owner had to live there, using it as their family home – but crucially, the beneficiary had to live there for some time before receiving the gift. As this was purchase din your son’s name but he lived there neither before nor after the purchase, it would not qualify under the dwelling house exemption.
But that ownership would certainly be enough to deprive him of access to various first-time buyer exemptions in recent years – including, for instance, Help to Buy, or the higher multiples on borrowing allowed under Central Bank rules – on the basis that he is no longer considered a first-time buyer.
The fact that your son is now back in Ireland, managing the property and getting an income from it on which he is responsible for taxes is, as you suspect, not relevant except insofar as the lack of any need for a transfer of the property to him on his return confirms that he has always been the beneficial owner.
That brings us to the complex element – at least to my mind – of the rental income over the many years until your son assumed control of the apartment and its letting. And it is certainly an area where you will need to take advice.
As the owner, he presumably should have been the beneficiary of any net income after taxes but in this case, it was you, his parents, who benefited. Revenue will, of course, be happy that appropriate income taxes etc were paid on the rental income – although that tax bill will likely be higher than if your son had paid it back then when he would have enjoyed the benefit of the lower income tax band on at least some of the rental income.
But I am not sure how Revenue will consider your enjoyment of the net rental income as anything other than a gift from your son to you. That raises potential issues for you and your wife as are considered as Category B beneficiaries for gift and inheritance tax purposes on anything you receive from your son, unless he has died.
That threshold was as high as the mid-€40,000s 20 years ago but fell as low as €30,150 for several years from 2012 and €32,500 from 2016. The thing is that this threshold is cumulative and applies to all gifts and inheritances each of you receive from a child, a sibling, an aunt or uncle or grandparents since December 5th, 1991.
The net rental income is likely to have topped this easily down the years, never mind any gifts or inheritances you might have received from other relatives in this category, so you might well have additional capital acquisitions tax liabilities on that rental income. As I say, it is now at area I have ever come across before – though it does fall squarely in the “informal family arrangement” scenario so beloved by Irish people – and I cannot find specific reference on how it should be treated. But as you don’t want to be caught out by Revenue, it would be worth getting specialist advice.
Getting back to the easy bit: how will Revenue value the gift by you to your son of this apartment? Assuming they accept he was the owner from the outset – the rent issue notwithstanding – and I see no reason why they would not, then it will be valued at what it cost at the time of its purchase.
Given the certain increase in its value since then, this son will benefit disproportionately on that basis – on top of the benefit he received from not having to meet the costs associated with the apartment, such as management fees etc. So, in fairness to the other two siblings, you might want to consider adjusting the bare split figure on your estate to recognise this.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to [email protected] with a contact phone number. This column is a reader service and is not intended to replace professional advice