I had a meeting on Monday that involved a property purchase in trust for a child.
This isn’t something we would see often so I needed to do some prep and get more information. It turned out to be a very interesting meeting and has me doing some head scratching since.
We will look at
- Background
- Jim’s numbers
- Bare Trust for a Minor
- Taxes involved
- CGT on current Sale
Background
The email into our info account read something like “CGT/Trust tax issues”. No issues with the CGT piece but trusts would have me running to the tax books. It was a case of “Dee will you go back to that guy to get a bit more info.”
Jim was calling in at 4.30 that same day so I had to get focused. A mail came back to say that he bought a house in trust for his son and had recently sold the property. There was a large gain with CGT owing of close to €50k.
Jim and Josephine Power bought a property in Carlow Town in 2013 in trust for their son John. John was 10 at the time. The property cost €151200. They let the property and returned the income tax on the property each year to Revenue using a Form 1 for Trusts. Jim got advice that he should do it this way.
Jim’s numbers
Jim drafted a CGT computation, and his numbers were as follows
| Sales Proceeds | €310000 |
| Legal & Auctioneering Fees | €6854 |
| Net Proceeds | €303146 |
| Less Costs | |
| Purchase Cost | €151200 |
| Legal Fees | €2584 |
| Enhancement Expenditure | €10414 |
| Gain | €138948 |
| CGT @ 33% | €45853 |
CGT Relief
The first thing that struck me was the date they bought the property. August 2013. That was at a time when property prices were on the floor. The government introduced some tax incentives to stimulate growth. One such incentive was CGT Relief. If you dispose of property acquired between the 7th of December 2011 and 31 December 2014. To qualify for this relief in full you must have
- owned the land or building for at least 4 years and up to 7 years and
- sold the property on or after 1 January 2018
Property owned longer than 7 years
There is partial relief when you owned the property for longer than 7 years. On a disposal of the property after 7 years the relief is 7 years out of the total period of ownership. Let’s assume you buy the property in January 2013 and sell it in January 2023 then you get CGT relief on 7/10th of the gain.
Jim wasn’t aware of this relief so when pointing it out he was very happy to hear about it.
Bare Trust for a minor
I am not a solicitor but my understanding of a bare trust for a minor in the Power’s case is
- Jim and Josephine make a cash gift to John
- Using that cash, they buy a property in trust for John and
- John is the beneficial owner of the property but
- His parents hold it in a bare trust for John as, owing to his age, he cannot hold an interest in the property
The key point, as we will see, is that John is the beneficial owner. The trustees are Jim and Josephine, and they are holding the property for John until he becomes 18. He is no longer a minor when becoming 18.
Taxes Involved
Mentioning those two words “Taxes Involved” can result in sleep-inducing symptoms. Please hang in there or read this just before you hit the bed.
CAT – Gift Tax
The CAT gift tax element arises on the creation of the trust being the gift of cash from the parents to John. The cash gift is the value of the property bought and that comes to
| Purchase Price | €151200 |
| Legal Fees | €2584 |
| Stamp Duty | €1512 |
| Total | €155296 |
| Less Gift Exemption €3000 x 2 | €6000 |
| Net Gift | €149296 |
A gift or inheritance from a parent to a child comes in under the Group A threshold. The value of that threshold in August 2013 was €225000. As John is the beneficial owner of the property, he is liable for any gift tax. Given that the value of the gift of €149296 is below the Group A threshold of €225000 John has no CAT to pay.
CGT on settlor
No CGT arises in this case as the parents gave cash to John and not an asset. There is no CGT on a cash gift.
Let’s assume the parents own a property in Kilkenny that they bought in 1995 for €150000 and they gift that to John. Say, the value of that property in 2013 is €250000. In this case they are disposing of a property, and they have a gain of €100000. They would pay CGT on that gain.
In a situation like that the beneficial ownership of the property is moving from the parents to John. There is a disposal and so CGT comes into play.
Income Tax
What about Income Tax on the income from the trust? In a bare trust scenario for a minor child, the income is to remain the income of the settlor. The settlors are Jim and Josephine. As a result, the rental income is part of his parent’s income until John reaches 18.
They would complete a rental income computation for each tax year. 50% of the rental profit would become part of Jim and Josephine’s taxable income and they would pay the taxes. The amount of tax payable will depend on what other income they both have in a tax year.
There can be scope for planning if one parent has a lower income and would pay little or no tax or pay at a lower rate.
In the year that John turns 18, 2021 in his case, they would split the year into two. The period before John is 18 and the period after. Up to 18, the parents would continue to pay tax on the income. Post 18 John would pay tax on the income.
The amount of income will determine if John needs to register for Tax and pay tax under self-assessment. Either way, he will need to do a tax return for 2021 and declare the income.
CGT on the current sale
Calculating the CGT on the current sale is what has me scratching my head with the biros at hand. Pieces of hair falling to the ground is not a good sight for a man that wouldn’t be one bit happy turning bald.
What leads to the uncertainty is whether John will qualify for the CGT relief or not. At first, I thought yes, he would and advised Jim of this. Don’t say that I’ll have to go back to him now and tell him that he won’t qualify! The reason for my doubt is thinking that back in 2013 the parents gave John a gift of the property. If that was the case then, per Revenue Guidance, John should have paid his parents 75% of the value of the property. Otherwise, there is no CGT relief.
However, thinking this through, and looking at some tax articles, the relief will apply. From the outset, it is John who is the beneficial owner, albeit a minor, and it is John who is selling the property. John bought the property, using a cash gift from his parents, in 2013.
CGT with relief
| Sales Proceeds | €310000 |
| Legal & Auctioneering fees | €6854 |
| Net Proceeds | €303146 |
| Less Purchase Cost | €151200 |
| Legal Fees | €2584 |
| Stamp Duty | €1512 |
| Enhancement Expenditure | €10414 |
| Gain | €137436 |
| Exempt portion 84/115 months | €100388 |
| Taxable Portion | €37048 |
| Less Personal Exemption John | €1270 |
| Taxable Gain | €35788 |
| Tax Payable 33% | €11807 |
From Jim’s numbers, we included the Stamp duty cost of €1512 as I asked him about this in our meeting. The gain is now €137436.
John owned the property for 9 years and 7 months or 115 months in total. 7 years or 84 months of the gain would be exempt. That comes to €100388. The non-exempt gain is €37048. Deducting the personal exemption of €1270, the net taxable gain is €35778. The CGT on that at 33% comes to €11807.
Overall, this is a tax saving of €34049 when compared to Jim’s original numbers. Worth a visit to us and some head-scratching too.
These are just some of the taxes that apply in a case of a property purchase in trust for a minor child. Other taxes like Stamp Duty and Vat could come into play. Please ensure you get proper legal advice when setting up a trust.
Do you need help to get your taxes right when renting or selling a property? If so, Start here
