Site for a house can be a costly gift
Feedback or queries about issues raised in this article are welcome. Contact: Carmel O'brien FCCA, AITI at info@psc.ie Peevers Slye Cotter, Riverside House, Dan Spring Road, Tralee (066 712 6333) www.psc.ie THERE is a tax relief available which allowed a site to be transferred to a child free of capital gains Ttx (CGT) and stamp duty. This relief was changed in the 2011 Budget and now only applies to CGT. There are a number of terms and conditions which must be met in order to claim this CGT relief but one of those conditions, which gives rise to problems in practice, is that no construction work can have commenced on the site before the transfer is made.
The following example illustrates this point and the possible consequences.
EXAMPLE:
Tom is a widower, who intended to transfer a site to his daughter Josephine in 2001. Josephine has four siblings. The open market value of the site was €28,000 in 2001. Tom acquired the site in 1981 at a value of €500. Josephine built her main residence on the site which is now valued at €350,000. As Josephine has recently married, she would like to transfer her home into joint names with her husband. However, Josephine now discovers that the original transfer of the site from Tom to her never actually took place.
If Tom had transferred the site in 2001, there would have been no CGT or stamp duty and also no gift tax (assuming that no other gifts/inheritances had previously been given to Josephine).
The position now is that Tom legally owns the site and the house on it, even though Josephine was the person who paid for the building of the house. Tom has never lived in this house. If he transfers this property to Josephine now, he will trigger a very significant CGT charge which could be as high as €100,000. In addition, Josephine would incur a stamp duty charge amounting to €3,500. Even though there would also be a gift tax charge, this charge could be offset against the CGT liability.
Alternatively, Tom could retain the property and pass the property when he dies. If he does so, it is vital that Tom makes a sill and that he makes a specific device to Josephine of the site and the house on it. Assets taken from estates do not incur CGT or stamp duty charges. There would be an inheritance tax charge for Josephine amounting to €30,000 approximately (under current legislation).
However, if Tom did not make a will, a further complication would arise, as his estate would pass by "intestacy". There are five children in the family and all five would be entitled to take an equal share of Tom's estate. As Tom owns 'Josephine's house', each of the Josephine's four siblings would be entitled to a one fifth share of her house. The siblings could disclaim their inheritance, but if they do so they must disclaim their full inheritance, which they may not be inclined to do. Alternatively Josephine could purchase the house at market value from her siblings. Either way, the position is quite difficult.
SUMMARY
This is a very complex area. My advice is to legally transfer the site on time before any construction work has commenced on the site. Failure to do so could give rise to very serious tax consequences, not to mention the potential for family disputes that could arise.
