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Granny’s gift could leave both her and grandson with financial headaches

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Granny’s gift could leave both her and grandson with financial headaches

My son has recently been told by his granny that she has left him her house in a will while she has moved to a nursing home, possibly under the Fair Deal scheme.

The complicated bit however is that she has also given him the keys and wants him to rent it out and keep the income. She basically has said the house is yours “do it up and rent it out, etc”.

The house is in Dublin, while he is studying elsewhere in the country. Legally, the house is still hers and is vacant. Basically, he is hoping to rent it out, and use the rent to pay his rent, etc where he is living.

I understand however this has complicated gift and tax implications… Any advice would be greatly appreciated.

Mr T.H.

God bless grannies. Many have had hard enough lives but they almost always seem to spend their time worrying about the financial wellbeing of younger generations… without necessarily concerning themselves with the minutiae of tax law and the likes.

And that is where the plan of this young man’s granny may come unstuck.

You can see the sense of her proposal. She intends leaving the property to her grandson anyway. Now, she can no longer live there as she needs long-term nursing home care so she figures it makes sense to just hand over the property now.

But it is inevitably more complicated.

Unless she formally signs the property over to your son, it is not his to rent or to do up. And if she does sign it over to him officially, it will likely trigger a capital acquisitions tax bill that could force him to sell the home. Which is not what she wants, I’m fairly sure.

There are limits to what a person can receive as a gift or inheritance and these limits are determined by the blood relationship between the two parties. In the case of a grandson receiving a gift or an inheritance from their grandparent, they qualify for a category B exemption.

This is fairly modest – at €32,500 – and means your grandson would have to pay tax on any value of a gift beyond this amount. He could also offset the small gift allowance – another €3,000 – but that still takes his tax-free limit to only €35,500.

And that threshold is cumulative, which means that it includes any gifts over the value of €3,000 and any inheritances that he may already have received from any grandparent, uncle or aunt by blood, or sibling. It also includes great-grandparents if one is lucky enough to have them.

If he inherits the property rather than getting it as a gift, he cannot even use the small gift exemption to raise the tax-free threshold.

As capital acquisition tax is levied at 33 per cent, the bill on this home he is gifted by his gran would likely run to tens of thousands of euro – and, unless he has uncommonly deep pockets, he won’t have the cash to pay that and will have to sell the property.

If the property is not officially his, any rent he receives from it rightly belongs to the owner – ie, his granny. Now, it is certainly up to her to decide to let him keep the money but, if she does so, we are back to those pesky capital acquisition tax-free allowances. The money he gets up to €32,500 – in the absence of any previous category B gifts or inheritances – will be free of tax to him. But not to her.

She could be affected in two ways. First, there is the mundane issue that rental income is a form of income and subject to tax in the usual way on foot of the filing of an annual tax return. The fact that she chooses to give the rent to her grandson does not absolve her of the tax liability as she owns the home.

Then there is the whole issue of Fair Deal. You‘re not sure whether the granny is claiming this State support to defray the cost of her nursing home care but the default would be to assume that she is.

If so, the subvention she gets from the State is determined by her income. She is expected to pay 80 per cent of her income towards her cost of care. Under special provisions designed to bring vacant homes of nursing home residents back into use during the housing crisis, just 40 per cent of her rental income will be taken into account, not 80 per cent.

There is also an annual charge of 7.5 per cent of any savings over the value of €36,000. In relation to her home, this 7.5 per cent per year is capped at three years and can be met through a nursing home loan that will be secured against her home and will fall due if it is sold or transferred to your son.

That could all get messy if she has handed the rent over to him.

And the same is true if she gifts it to him as, under Fair Deal, there is a five-year clawback of disposals from a person’s estate to make sure they are not paying less than they should according to the means for their care.

Of course, waiting to inherit does not necessarily make things any easier unless he has built up savings to meet the cost of the inevitable capital acquisitions tax bill.

The “easy” solution would be for him to move into the home and live there for at least three years before his granny dies. He could then receive the property tax free under the dwelling home exemption as long as he owned no other property – or share of a property – and is happy to live in the home or a property bought with the full proceeds of any sale of the home.

The fact that he is studying in another part of the State and is thus unable to physically reside in the property would tend to undermine this option, attractive as it may be.

And if the granny is using Fair Deal, there will be the loans of up to 22.5 per cent of its value to pay back to the HSE which might involve the property’s sale anyway.

All told, this wonderful gesture to your son from his granny could open up a world of financial pain for both of them. He and she would need to tie down exactly what their financial circumstances and tax liabilities would be before going any further.

I certainly would not spend money that he may never get back doing it up, or rent it out until he is a lot clearer about the situation.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice

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