Our son lives rent-free in our second home. What are the tax implications with Revenue?
Question: My wife and I have a second home, a nest egg. Our last tenant moved out in April and we let our son move into the house rent free. He pays the utility bills. Is this acceptable to the tax authorities or will there be problems?
We mentioned in a recent article about pepper rent and wondered if our situation would be covered by charging our son a nominal fee as rent? And if so, should a contract be drawn up?
Answer: This seems like a good solution to a common problem, and housing your son is of course not a problem in itself.
Marian Ryan, Consumer Tax Manager at Taxback.com advises: “In the case of a home rented to a child for free/reduced rent, the difference between the charged rent (if any) and the market rent is considered a taxable gift for capital. the acquisition tax, unless your son is under 18 or under 25 and in higher education.
“The first €3,000 of the total value of all gifts received from a person in a calendar year is exempt. Since your property is jointly owned by you and your wife, your son can benefit from €6,000 in tax-exempt donations. So, if the annual market rent is less than or equal to €6,000, your son will not have to pay tax.
“If the amount of the deemed gift exceeds the €6,000 annual exemption, then the relationship between the person making the gift and the person receiving the gift is key in determining the liability to capital acquisitions tax. The threshold for group A (gifts/inheritances from parents to children) currently stands at €335,000.
“This threshold is a lifetime threshold and all gifts or inheritances received within the same group must be aggregated. When the amount of the gift or inheritance exceeds 80% of the group threshold, your son will have to provide a CAT declaration called IT38. The tax implications for you could be more complicated.
“If no rent is charged, there will be no further tax liability. However, if reduced rent is charged, you will be subject to tax at your marginal rate (up to 52pc) on your rental profit (gross rental income less allowable expenses) Rental profit must be reported on your annual tax return(s), which may be Form 12 or Form 11. Individuals whose total unPAID net income is less than €5,000 (but not zero) can file a Form 12 tax return.
“However, if your non-PAYED income exceeds €5,000, you will need to register for self-assessment and provide a self-assessed tax return form 11 each year. In the case of jointly assessed couples, the €5,000 threshold applies to the unPAID joint income of both spouses.
“Also, if you cannot profit from the rent collected, it will be considered an unprofitable rental. You cannot offset losses you make from unprofitable rentals with other rental profits.
Seems to me you just want the property occupied and doing your son a favor. That’s fine, but make sure the details are made public and independently verified, especially when it comes to assessing lost rent.
Question: I live and work outside of Ireland. I have a property in Ireland which is let to some tenants. The rent is very low, especially by today’s standards. My tenants and I signed a contract agreeing that if either party wished to terminate the contract, one month’s notice would suffice. Are my tenants legally entitled to longer notice if I choose to terminate the contract?
Also, do I have to pay taxes on my rental income or is it only above a certain amount? I don’t earn a salary in Ireland because I work overseas.
Answer: Regarding the tax, I have received a few questions about this since a recent question from a tenant with an absentee landlord. So, to recap, Gerry Scully of Tax Return Plus says yes, you have to pay income tax and universal social charge on the profits from your Irish rental property.
However, as a non-resident you are exempt from PRSI. The tax is applied using the single rate tax bracket at 20 pc up to €36,800 and 40 pc above. USC is zero up to €13,000 and 0.5 to 4.5 pc above. You may qualify for part of the personal tax credit of €1,700 (based on the proportion of your Irish income to your worldwide income) and you will likely benefit from a briefing from an accountant or adviser familiar with the tax law of your place of residence. .
If you do not appoint an Irish collection agent, your tenant is obliged to deduct 20pc of withholding tax.
Now, in terms of the tenancy agreement with your tenant, that could be inconvenient. The Residential Tenancies Commission indicates that in a fixed term lease, a notice of termination may be given for three reasons: (a) a break clause in the contract, (b) both parties agree to terminate the lease or (c) where the lessee has breached its obligations and has been given a reasonable period of time to remedy the breach.
If your tenant disputes this, they can do so with the RTB, so it may be worth contacting them to verify your position.