Continue to "rent" from parents or buy from them?

Skeletor85

Hi all, I've read through lots of similar threads on this but would really appreciate some advice nonetheless.

Nearly 40, single with no children, average-paying full-time job. I've been unofficially renting my family home from my parents (they built another one a long time ago) for 10+ years at this stage, paying them cash. I was clinging to the idea that I'd have more money saved by now to buy / build my own house but I've come to the realisation that it's a pipe dream, especially trying to fund it single-handedly.

Anyway the house I'm in was recently valued at 220,000. It's an early 80s bungalow that is completely habitable but needs a lot of upgrading. Both myself and my parents were expecting something closer to 150,000 but 220,000 is apparently the very lowest it could be valued at. My parents would love for me to buy it from them, and I'd be happy to do so but I'm wondering what the better option is for both myself and them - get a mortgage and buy it directly from them immediately, they gift it to me but I continue paying "rent" for the foreseeable future, or I continue paying "rent" and eventually inherit it? I've never been gifted anything from them, or any relative, before.

Any advice is greatly appreciated. Many thanks.

ELM327

Option1: you getting a mortgage to buy. This will expose your parents to CGT liability as it was not their PPR.

Option2: They gift it to you. This is the easiest option once they can trust you'll continue paying rent

Option3: Continue as is until you inherit it: This is all round the easiest option IMO.

In option 2 and 3, you parents would be liable for income tax on the rent you pay. Option 1 changes the taxation from income tax to CGT

Purple Mountain

The main factor here would be trust and if a future partner/kids come on the scene.

Really need a solicitor opinion.

Skeletor85

Thanks to you both for your replies, especially ELM327 for spelling out the pros and cons concisely. I'll need to give options 2 and 3 some thought. Much appreciated.

Akrasia

It is interesting the difference between how the wealthy consider intergenerational wealth vs how the middle classes often see it

The wealthy get loads of advice from their accountants about how to hand over their wealth to their children in the most tax efficient way, giving the maximum annual gifts to their children without affecting inheritance, creating trusts, using tax exempt gifts and providing free housing and accommodation, healthcare and education for their children well into their adult years

And then some amongst the working and middle classes see it as spoiling their children to give them anything that they didn't work for.

For all the 'work ethic' promoted by the working and middle class parents on their offspring, in terms of outcomes, even the lazy children of wealthy parents end up as wealthy property owning high net worth adults, while many of the poor and middle class children will never own their own property no matter how hard they work, and when it comes to inheritance, they'll have the tax man take the maximum cut out of anything that is left to them after their elderly parents have been asset stripped by the 'Fair Deal' scheme in their remaining years.

You have to ask, what are the parents hoping to do with their second property, they have a 40 year old child, so they're likely in their advanced years, probably have a good pension and own the house they're currently living in.

What good does collecting rent do for them? Is it going into a savings account so that can feel richer, but also so they can be taxed on the income their son pays them, and then their son gets taxed on the inheritance he gets back when they die?

Peregrinus

Couple of thoughts.

Right now, the parents have a liability to income tax on the rent they receive from the OP. It's possible that this may have been, um, overlooked up to this point. ELM327 mentions income tax liablity as a possible future issue, but think it's an issue right now.

Secondly, as ELM237 points out, if the parents sell the house to OP (option 1) the question of CGT arises — the house is not their principal private residence. Because this is a transfer between connected parties, market value will be interposed, so they'll be treated as disposing of it for €220,000 regardless of what price the OP actually pays, and their gain will be calculated on that basis. We don't have enough information in the OP to calculate their gain, or the tax on it. If the house was their PPR for part of the period of ownership, that will reduce the amount of CGT payable.

Thirdly, CGT also arises if the parents gift the house to OP (option 2). This is still a disposal for CGT purposes, and it will be treated as having been made at market value, and CGT will be calculated on that basis. They have the same CGT liablity whether they sell or gift the house to the OP.

Fourthly, under option 2 (parents gift the house to OP), ELM237 suggest that the parents will have a liability to income tax on the "rent" payments that OP will continue to make. I don't think this is right. Why would OP pay rent to his parents for a house that he owns? So, if OP does make regular payments after the house is gifted to him I don't think they can be characterised as rent.

If there's an agreement by which OP will make regular payments for the lives of his parents in return for getting the house that's not rent, it's a purchase, and I think the present value of the income stream is the purchase price. It won't be liable to income tax in the parent's hands. As noted, the transaction does attract CGT but that will be based on the market value of the house, not the notional value of the periodic payments that OP agrees to make.

However if there's no agreement or obligation and if OP simply voluntarily makes regular payments for the support and comfort of his aged parents, that's not purchase money; it's a gift. It will attract gift tax in the hands of the parents.
They can avail of their €3,000 per annum small gifts exemption, but if the annual payments made by the OP exceed €3k then the excess is within the charge to gift tax. A gift from child to parent falls into CAT group B, and each parent has a lifetime allowance of €32,500 for group B gifts. So assuming they have received no gifts or inheritance from anyone else in group B, between them they can get payments totally €65,000 (on top of the annual small gifts exemption) from OP before they have to start paying gift tax. After that, gift tax would be payable at 33%.

(Of course, the gift of the house, or sale of the house at an undervalue, to OP is also a gift. But a gift from parent to child is in group A, and OP can get up to €335,000 in group A gifts and inheritances before he has any liablity to gift tax. The house is worth much less than that so, unless OP has received substantial other gifts from his parents his gift tax bill will be nil.)

mrslancaster

If the parents gift the house to OP, and then OP gifts them the equivalent of the CGT (up to the 65k ceiling) so parents can pay the tax, then OP ends up with a house, CGT is paid, but that leaves parents with no proceeds from a sale, or no rental income.

If OP has been gifting up to 6k per annum while living in the house, that is tax exempt on the parents side but what about OP? Does the implied rental value reduce the threshold value from parent to child and if OP has been living there and acting as a caretaker of the property, does that make a difference?

Skeletor85

Thanks again for the replies - although we’ve a lot to think about, the info and questions here are very helpful. I hadn’t realised just how tricky it can be to pass property from living parents to their children until I started all this and it seems like the tax bill will be significant no matter what.

Just to clarify a few things - The house I’m in hasn’t been my parents’ PPR in a long long time. They built another property, which they’ve only recently paid off the mortgage for. They’re both pensioners with about a year and certainly don’t have big pensions by any means. The “rent” I pay is always in cash and is not lodged into any bank account so how can it be proven to be rent, if it comes down to it?

I appreciate everyone’s time and input.

Peregrinus

You have exclusive occupation of a house that they own, and you pay them money on a regular basis. I don't think it's going to be too difficult for anyone to join the dots.

It's not up to the revenue to show that it's rent; if the situation comes to their attention they assess it as rent and then it's up to your parents to appeal the assessment and show that it's not rent.

Having said that, if your parents' income is modest it's possible that their tax liablility on the rental income would be low in any event. And if the house is transferred to you, any future payments you make are not rent and this particular problem goes away.

Peregrinus

https://www.boards.ie/discussion/comment/122026496#Comment_122026496

There's no need to do this with a pair of reciprocal gifts, which looks a bit shonky anyway. OP can just buy the house for a purchase price equal to the parents' CGT liability.

Donald Trump

https://www.boards.ie/discussion/comment/122025213#Comment_122025213

I think that the term "middle class" needs to be redefined for modern times. I see people being described as such for having a job that would have been seen as a little prestigious maybe 50 years ago but might not be held in that regard today.

The Fair Deal is a big benefit to the asset wealthy. The alternative would be to let people with assets pay for their own care - or have their family take care of them. People can opt not to go into the Fair Deal if they want. It isn't mandatory.

And there is a reasonably generous (if reduced compared to Celtic Tiger) lifetime threshold for CAT. Those are benefits that those with little or no assets cannot make (much) use of.

DFB-D

https://www.boards.ie/discussion/comment/122027350#Comment_122027350

It's probably worth a wealth planning session with a tax professional.

For example, calculate the CGT to determine the potential liability. If bought in the 80s, your parents can use indexation on the purchase cost and also partial PPR relief.

And then it might be a matter of waiting for the market value to fall to minimise CGT.

You also have the lifetime CAT and annual CAT allowances to reduce taxable amounts.

Peregrinus

https://www.boards.ie/discussion/comment/122029279#Comment_122029279

The Fair Deal is how people with assets pay for their own care.

Donald Trump

https://www.boards.ie/discussion/comment/122033080#Comment_122033080

The Fair Deal is how people with assets pay for contribute towards their own care.

RoboRat

Anyway the house I'm in was recently valued at 220,000. It's an early 80s bungalow that is completely habitable but needs a lot of upgrading. Both myself and my parents were expecting something closer to 150,000 but 220,000 is apparently the very lowest it could be valued at.

Just because it's been valued at €220k, doesn't mean that's what it has to be sold for. Perhaps I'm wrong but it's their house, and if they want to sell it for whatever price, they should be able to. As long as the price is reasonable, they could justify that they want to ensure whoever buys it maintains it, or has a good relationship with the local community.

Peregrinus

https://www.boards.ie/discussion/comment/122033447#Comment_122033447

They can sell it for whatever price they like (that someone is willing to offer), just as they can give it away. But if they sell it to a family member, like their child, then the tax consequences will be based on the open market value of the house, rather than the sale price.

Donald Trump

https://www.boards.ie/discussion/comment/122033447#Comment_122033447

If they sell it below its value then that would constitute a gift for the difference up to whatever Revenue might assess it at

RoboRat

https://www.boards.ie/discussion/comment/122033460#Comment_122033460

OK, thanks for clarifying that. It's a bit **** as the market value is only representative of the value right now, which is very inflated. Revenue always has to get its pound of flesh though, and they'll make sure they take as much as they can.

Peregrinus

https://www.boards.ie/discussion/comment/122034034#Comment_122034034

To be fair, the timing of the sale/gift is determined by the owners of the property. If they choose to sell/gift it at a time when the market is high, then it'll be valued based on what they could sell it for in the open market at that time. If they think the market value is likely to fall in the future and they want to minimise the tax cost of the transacction, they can put off the sale/gift until the market value falls to a level they are happy with.

SharkMX

I know a couple who live in a house on their parents land. I think its the grandparents old house that they got back in a living state about 20 years ago and used for b&b for a while before this couple moved in.

The dont pay rent to the parents. The parents pay them for "minding the house". In the meantime they also gift them and their 2 children €3 k a year each x 2. I think the main house is going to be willed to the siblings and the couple will get this house.

There are all sorts of financial goings on around these things to save in taxes and any farming solicitor will advise you of what your best options are.

spaceHopper

Get professional tax advice. 220k is below the 330k CGT inheritance threshold form a parent, so for now you are fine. But only for now. You could get a loan from them to buy it. With a repayment schedule of 3000 a year. They the give you a gift of 3000 a year (tax free). They way you get the house. If you've spare rooms do rent a room, they will be licensees and you can evict them if you don't like them. Use the rent to pay for upgrades.

Marcusm

https://www.boards.ie/discussion/comment/122022426#Comment_122022426

if they gift it to him it is a disposal even at market value. It is not an income tax matter. It’s gift tax for the recipient with CGT for the parents and a likely offset.

Marcusm

just on Pergrinus’s note, if the sale is for instalment payments under option 2, the CGT disposal proceeds is the full nominal value of the future payments not the present value of such payments. If the payments took into account the time value of menu it would lead to higher CGT than under option 1.

Peregrinus

https://www.boards.ie/discussion/comment/122039273#Comment_122039273

What is the situation if the annual payments are to continue for an indeterminate period, e.g. for the lives of the vendors?

ULEZ23

https://www.boards.ie/discussion/comment/122022426#Comment_122022426

@Skeletor85 not all of the above is correct!

option 2 also attracts cgt for your parents, at 33% and it’s on the difference between market value and purchase price. So even if they give it to you for €0 they pay 33% cgt on the difference between market value (not sale proceeds) and purchase price. They will get a % deduction for the time they occupied as their main home (PPR)

another risk is the government nursing home scheme, if they avail of this but continue to own your home the rent money will go to the state. Recommend you read up on this.

my advice would be morgage and buy. You never know what might happen in the future and you could be 60s and all of a sudden lose your home.

Your biggest issue at the moment is paying rent in cash, banks want to see a money trail. If your parents aren’t paying income tax then you are in a major pickle, and I would say they are too.

another option is do you simply buy elsewhere? Renovations are big € and stress

Skeletor85

Thanks again to everyone who has contributed to the thread, much appreciated. I'm leaning towards getting a mortgage and buying the house at this stage due to the very real risk of my parents getting caught for backdated income tax on the rent, which they will not be able to afford. Maybe I could absorb the CGT, depending on how much it is. The house was built in 1982 and was their PPR for 20 years.

Although the house is valued at 220,000, if they were to sell it to me at say 150,000 are there further tax implications for this too?

We did speak to a solicitor briefly but he's a semi-retired friend of theirs (they wouldn't hear of seeing anyone else at the time…you know yourselves) and was useless really but I'll definitely be making an appointment with another solicitor in the coming weeks.

Thanks again.

Marcusm

https://www.boards.ie/discussion/comment/122041265#Comment_122041265

That then is a question of unascertainable contingent consideration which can involve a valuation. Conventionally, unless there is a contingency then there is no discounting and the maximum future amount is treated as disposal proceeds. If the consideration here is only for the life of the vendors there might be some discounting. However, it would be quite unusual given the non-arm’s length nature of it (as opposed to acquiring a reversionary interest.). As a full interest is being acquired, the minimum amount to be taken into account would be the market value as the non-arm’s length sale provisions would essentially take precedence. Otherwise, s811C might apply as a backstop to the clear lack of substance.

Peregrinus

Mmm. I think we need to distinguish between the treatment for CAT and CGT purposes.

If the parents give OP the house, worth €220k, and in return he gives them a commitment to pay €x per month for their joint lives, for CAT purposes that is a gift of [€220k - capital value of the promised payment stream]. There are actuarial tables in the CAT Act for valuing a life interest; they can be applied to value )a life interest in a payment stream of €x/month.

(As it happens, the CAT liablity is likely to be nil anyway, because OP is getting the house from his parents. But this would be a live issue if, say, the house was coming from an uncle and aunt.)

For CGT purposes, because this is a transfer between connected parties, the parents will be treated as disposing of the property for its market value, €220k. The question of valuing the consideration they actually get, the promise of €x/month for their joint lives, doesn't arise. But if this were an arm's length transaction between strangers, done on these unusual terms simply because it suited both parties, then you would have to value the payment stream in order to put a figure on the proceeds of disposal. And I don't think there are actuarial tables in the CGT legislation to do that, or any provision for applying the CAT Act actuarial tables for the purposes of calculating a chargeable gain.

I guess you'd just look at the market price for an annuity of €x/month on the joint lives of a couple of the age and gender of the disponers.