Ask an expert: ‘Our son is living rent-free in our second house. What are the tax implications?’

The difference in what your son pays and the market rent could be considered a taxable gift

Sinead Ryan

Sinead Ryan answers your property finance questions.

Question: My wife and I have a second house, a nest egg. Our last tenant moved out in April and we let our son move into the house rent-free. He is paying the utility bills. Is this acceptable to Revenue or will there be issues?

You mentioned in a recent article about peppercorn rent and we’re wondering if our situation would be covered by charging our son a nominal fee as rent? And if so, would we need to draw up a contract?

Answer: This sounds like a good solution to a joint problem, and housing your son is, of course, not an issue of itself.

Marian Ryan, Consumer Tax Manager with advises: “In case of a house rented to a child for free/reduced rent, the difference between the rent charged (if any) and the market rent is regarded as a taxable gift for capital acquisition tax, except where your son is either under 18 or under 25 and in third-level education.

“The first €3,000 of the total value of all gifts received from any one person in any calendar year is exempt. As your property is jointly owned by you and your wife, your son can benefit from €6,000 tax free gifts. So, if the annual market rent is €6,000 or less, your son will face no tax bill.

"If the amount of the deemed gift exceeds the annual exemption of €6,000, then the relationship between the person who is giving the gift and the person who is taking the gift is essential for determining the capital acquisition tax liability. The Group A threshold (gifts/inheritances from parents to children) currently amounts to €335,000.

“This threshold is a lifetime threshold and any gifts or inheritances received within the same group must be aggregated. Where the amount of gift or inheritance exceeds 80pc of the group threshold, your son will be required to deliver a CAT return called IT38. The tax implications for you could be more complicated.

“If no rent is charged, there will be no further tax obligations. However, if a 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 expenditure). Rental profit must be reported on your annual tax return(s) which could be either Form 12 or Form 11. People whose total net non-PAYE income is less than €5,000 (but not nil) can file a tax return Form 12.

“However, if your non-PAYE income exceeds the amount of €5,000, you will have to register for self-assessment and deliver a self-assessed tax return Form 11 each year. In case of jointly assessed couples the €5,000 threshold is applied to the joint non-PAYE income of both spouses.

“In addition, if you cannot make a profit from the rent received, this will be considered an uneconomical letting. You cannot offset losses you make from uneconomical rentals against other rental profits.”

It sounds to me like you simply wish the property occupied and to do your son a favour. This is absolutely fine, but do get the details out in the open, and independently verified, especially when it comes to valuing the rent foregone.

Question: I live and work outside Ireland. I have a property in Ireland, which is rented out to some tenants. The rent is very low especially by today’s standards. My tenants and I signed a contract agreeing if either party wished to terminate the contract, one months’ notice would suffice. Are my tenants legally entitled to more notice if I choose to terminate the contract?

Also, should I be paying tax on my rental income or does that happen only over a certain amount? I don’t earn a salary in Ireland because I work abroad.

Answer: In terms of the tax, I got a few queries on this since a recent question from a tenant with an absentee landlord. So, to recap, Gerry Scully of Tax Return Plus says yes, you do have to pay income tax and Universal Social Charge on the profit from your Irish rental property.

However, as a non-resident you are exempt from PRSI. Tax is applied using the single rate tax band at 20pc up to €36,800 and 40pc above. USC is zero up to €13,000 and 0.5-4.5pc above. You can avail of a portion of the Personal Tax Credit of €1,700 (based on the proportion of your Irish income to your worldwide income) and you would probably benefit from a briefing from an accountant or tax adviser familiar with tax law where you reside also.

Where you do not appoint an Irish collection agent your tenant is obliged to deduct 20pc withholding tax at source.

Now, in terms of the rental agreement with your tenant, this could be troublesome. The Residential Tenancies Board says in a fixed-term lease a Notice of Termination can be served for three reasons: (a) a break clause within the agreement, (b) both parties agreeing to terminate the tenancy or (c) where the tenant has breached their obligations and been given reasonable time to rectify the breach.

If your tenant disputes this they can do so with the RTB so it might be worth your while contacting them to check your position.

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