We’ll look at what’s involved tax-wise on the transfer of a site to a child. The idea for this came from a meeting I had with the Falcones during the week. John Falcone is the dad. Bridget Falcone is the mother and owns the land. Molly Falcone is the daughter. Points to cover will include
- Introduction
- Taxes involved
- Reliefs available
- Next steps
- Summary
Introduction
Bridget owns the land and she and John have been farming it for years. Both are over 55. They want to transfer a site to Molly. Molly wants to build her home on the land. The size of the site is under 1 acre. Just about, so a push mower won’t work when the lawn needs cutting.
The site has planning already, and they got a verbal valuation for €175,000. I thought this was high but understandable given it’s close to the city. A high value doesn’t work for now, but we’ll get to why in a bit. Molly Falcone looks me in the eye and tells me straight. “I don’t want to pay any tax on this” Her parents smile with pride at their Molly. They know she’s a straight talker.
But can she get her wish? Let’s see.
Taxes Involved
Bridget is gifting the site to Molly. She’s getting nothing for it, so there can’t be any taxes! Surely. Wrong. She’s disposing of an asset so Capital Gains Tax is the concern for her. The land has been in the family for a long time. Let’s assume a base cost of €3,000 per acre. Ignoring any reliefs, the tax liability would be €56,000.
| Market Value of Site | €175,000 |
| Less cost of the transfer | €1,000 |
| Less cost of 1 acre | €3,000 |
| Gain | €171,000 |
| Personal exemption | €1,270 |
| Taxable Gain | €169,730 |
| Tax Payable 33% | €56,011 |
Bridget twitches nervously and turns a lighter shade of pale when she hears this number. Molly is nonplussed. That’s the mother’s problem. Bridget needs assurance so I pipe up.
“Don’t worry Bridget there’s tax relief here, so you won’t have to pay that.” Colour returns to her cheeks, and we move on to the next tax.
Gift Tax
Gift Tax and inheritance tax are the same and fall under the title of Capital Acquisitions Tax. The person who receives the gift or the inheritance pays the tax and handles the tax returns. Like CGT the rate is 33%. Molly never received any previous gifts from her mam or dad. As a result, her full parent-child threshold is still in place.
That’s good news for her. The parent-child threshold falls into Group A and the current value of that is €335,000. This limit applies to all gifts and inheritance received from the 5th of December 1991.
Given that the value of the site is less than €335,000 Molly won’t pay any gift tax. The main issue for her is that the high value eats up a lot of her threshold.
| Site Value | €175,000 |
| Deduct the small gift exemption | €3,000 |
| Value of gift | €172,000 |
| Group A threshold | €335,000 |
| Balance of threshold | €163,000 |
Stamp Duty
This is where the meeting gets a bit tense as Molly isn’t happy. There are two rates of Stamp Duty on property.
- 1% for residential property
- 7.5% for commercial property
The purchaser or recipient of the property is liable to pay the tax. It’s a fair assumption to make that a site with planning is residential property. Unfortunately, that’s not the case. A site, even with planning, is commercial property and the higher rate of 7.5% applies. That’s a whopping €13,125 of stamp duty. Molly turns and gives me a dagger look. The song by Wheezer comes to mind. “Say it Ain’t So”
Reliefs Available
There are reliefs available. To wipe out the Capital Gains Tax cost and reduce the Stamp Duty. Like The Beatles song “Here Comes The Sun”. Relief is on the way.
Capital Gains Tax
There is a transfer of a site from a parent to a child exemption. It applies once you meet the conditions.
- The size of the site is less than 1 acre.
- The value of the site is less than €500,000.
Great news for Bridget as she’ll have no CGT to pay. From 1 January 2019, you can transfer a site to a child and the spouse or civil partner of your child. That change can help those applying for a mortgage as the bank could want the land to be in both names.
Bridget needs to claim the relief on her annual Income Tax return in the CGT section. Given that the disposal will be in 2023 it will be on her 2023 Tax return.
Stamp Duty
There is some stamp duty relief available. The Residential Development Stamp Duty Refund Scheme. Not enough to eliminate the tax but still valuable, nonetheless. The relief applies when you build a residential dwelling on non-residential land. The maximum amount of refund you can claim is
- eleven-fifteenths of the Stamp Duty if you paid Stamp Duty at the 7.5% rate.
For Molly, the refund comes to €9,625 so the net cost for her will be €3,500.
She must pay the Stamp Duty at the non-residential rate first. After filing the Stamp Duty return and paying the tax she’ll get a certificate showing the tax that she paid. She can then claim the refund once the building work starts. Per Revenue guidelines building work commences when the following happens
- site clearance
- drainage
- earth-moving
- excavation
- the laying of foundations
The claim is online through ROS or MyAccount. She’ll need a commencement notice from the Local Authority. Plus, she’ll need to be careful about completing the building work. The time limit is 30 months of the Local Authority commencement notice.
John Falcone assures Molly that a tax cost of €3,500 isn’t too bad. Molly gives him a death stare. I understand that stare as meaning.
“Mind your own business. If I wanted your opinion, I would have asked for it”
Traps
To avoid the trap Molly must abide by the rules. For the Stamp Duty refund she must complete the building work within 30 months. But she also needs to complete the refund claim within 4 years of the date the building work starts.
There is also a clawback of the CGT relief and that impacts Molly and not Bridget. If she disposes of the site without
- Having constructed a principal private residence [PPR] on the site and
- Occupied it as her PPR for at least 3 years.
Then she would become liable for the Capital Gain that Bridget would have been liable for on the site transfer. The clawback wouldn’t apply if Molly transferred an interest in the site to a spouse or civil partner.
Lower Valuation
If it is possible to get a lower valuation that would help with a
- Reduction in the stamp duty cost
- Use up less of the Group A threshold so more is available for future gifts or inheritance from her parents.
- Lower CGT clawback if Molly sells the site or doesn’t live in the house for the 3-year period.
While a lower valuation would be better now. A higher valuation could be beneficial later if Molly sells the house. The house and site cost would be higher and that could reduce CGT in the future. But only if it is not her main residence, and she needs to be careful with that.
Summary
The CGT relief is very valuable in this case given the site value. By claiming this relief Bridget isn’t claiming other reliefs like Retirement relief. Therefore she protects the value of that relief. As the site had planning it makes it valuable. To reduce the stamp duty cost you could transfer the site without planning. Then it would have agricultural value. Let’s say that’s €15,000 for an acre. The stamp duty cost is then only €300, after getting the relief.
It was interesting to meet the Falcones. It was important for them to get the right advice to ensure they do the right thing. Plus take advantage of the reliefs available and pay as little tax as possible.
If you are doing a transaction like this, please talk to your advisor.
Need help to understand the taxes when gifting assets to your children? If so, start here
