Your MoneyQ&A

Avoiding double taxation on sale of a property abroad

Rules on gifts and inheritances are different North and South of the Border, as is the tax regime on non-resident property

Selling the home your father gifted you in Norther Ireland will require you to file tax returns in the UK and here, with two separate tax bills. Photograph: Andrew Matthews/PA
Selling the home your father gifted you in Norther Ireland will require you to file tax returns in the UK and here, with two separate tax bills. Photograph: Andrew Matthews/PA
Dominic Coyle's picture
Dominic Coyle
Sun Dec 08 2024 - 12:51

A number of years ago my father signed over his house in Northern Ireland to his three children equally As long as he lived at least seven years and paid a realistic rent then when he died, the property would not appear in his estate.

I live in Dublin. My brother and sister reside in the North.

My third share of the rent has always been declared to Revenue here. He died recently. The house was signed over at least 15 years before he died.

There will be some CGT to pay. Will my third share be due in the North or do l have to pay it to revenue here? l want to avoid double taxation.

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Mr J.G.

The only thing that might be worse than being caught not paying your tax is to find out you have needlessly paid it twice over on the same liability, so I can certainly see why you want to nail this down. Obviously taxation across borders is, by definition, more complex than dealing with just one jurisdiction.

There are two issues here. We will get around to capital gains but it probably makes sense to start with what happened 15 years ago. You mention seven years, a feature that would be very familiar to anyone living in the United Kingdom but less so down here.

Under the seven-year rule in the UK, if someone gifts an item absolutely to another person during their lifetime and survives for a further seven years, that gift is not included in the donor’s estate when they die. In other words, it will be exempt from the UK version of inheritance tax.

One of the key things under the seven-year rule is that the person making the gift should enjoy no further use of the asset: otherwise, it becomes a “gift with reservation” and falls back into their estate for inheritance tax purposes when they die. That was why it was so important that your father paid a market rent on the property after it was gifted. As long as the “realistic rent” was what the market would dictate for the property, the seven-year rule exemption is intact: otherwise, it is not.

So, inheritance tax is not an issue for your brother and sister because they live in Northern Ireland. However, there is no equivalent of the seven-year rule in the Republic, and that has implications for you. Put simply, you cannot rely on the seven-year rule to absolve yourself of liability for capital acquisitions tax as the tax on gifts and inheritances is known in the Republic.

The rule is that if either the donor or the recipient of physical property resides in the State for tax purposes, even if the property is outside the State, they will be assessed under Irish tax laws for liability.

Whether this means you have an outstanding tax bill will depend on the value of the property. I suspect not least as it was divided among three of you but it will certainly affect what else you can inherit from parents.

You say nothing about the value of the property but, for simplicity’s sake, let’s say it was worth €600,000 at the time it was gifted to you and your siblings. In that case, your share would be valued at €200,000.

We all have a certain level of gifts and inheritances we can receive free of tax and this exemption is most generous for items passing from parents to their children. At the moment, this tax free threshold is €400,000.

Clearly your €200,000 gift would be below this level but it does mean that the most you can receive from your parents in other large gifts (amounts over €3,000 in any year) and inheritances is another €200,000 before you become liable for tax at 33 per cent. So unless this was a spectacular property, or you had already received significant gifts from either parent or inheritance from your mother, you will not yet be liable for inheritance tax — although your father’s subsequent death and any inheritance from his estate at that point may have now tipped you over the limit.

Of course, before everyone pulls me up on this, what matters in terms of the gift of this house is not today’s tax-free threshold but the figure that was in place at the time it was made.

As it happens, back in 2009, which is when we are talking about, the Irish tax-free threshold on inheritances was as high as it ever has been — €542,544 until April 7th and €434,000 for the rest of the year — so that is not an issue in this case.

That’s the gift tax or capital acquisitions tax issue addressed. But what about capital gains?

Because the property is physically located in Northern Ireland, it will be liable to UK rules on capital gains. However, as you reside for tax purposes down here, you will also be liable to capital gains tax (CGT) in the Republic. So how does that work?

I am working on the basis that you are now selling the property after your father’s death as capital gains only become an issue with the gain on an asset — in this case, your father’s former home — is crystallised.

The situation is further complicated because the rules on people resident outside the UK selling UK property changed in 2015. Essentially only the gain in the value of the property since April 7th, 2015 is liable for capital gains. But, to mess with your head, there are three ways of calculating this.

You can get the market value of the property in April 2015, deduct it from the sale price, allowing for any enhancements to the property since that 2015 date only and any costs involved in its sale. This is the most regular approach.

So if the property sells for, say, the sterling equivalent of €900,000, your share is €300,000. Your share of the cost of the sale might be €10,000, so that is €290,000 net, from which you subtract the value of your share of the property in 2015 — say €250,000. That leaves you with a capital gain of €40,000.

However, you can also go by apportionment. Under this, you take the sale price minus any disposal costs and subtract from that the original valuation when the home was gifted to you to which you can add any costs incurred in the original transfer.

Then you sort out the gain on a pro-rata basis by month. So assuming you got the gift in March 2009 and sell this month, you will have owned it for 189 months and 116 months have passed since April 2015, so you take 116/189ths of the gain to assess your liability.

So sticking with the figures above, your valuation at gifting was €200,000 and your portion of the sale price is €300,000, minus €10,000 in sale costs. Say, your cost of acquisition was €4,000. So we have €300,000 — €10,000 — €200,000 + €4,000 = €86,000. That is your “base cost and 116/189ths of that is €52,783 — (€86,000 X 116 / 189 = €52,783). In this case, you are better off going with the 2015 valuation basis.

You can also simply assess the gain (or loss) in value between the time you acquired the property and its sale, minus the relevant costs, but that will almost always leave you with a bigger bill.

So, your best case scenario in this example is a gain of €40,000. You are almost certainly entitled to a capital gains exemption on the first €3,000 of that gain. That exemption is half what it was last year and less than a quarter of the €12,300 that applied before then but that’s the luck of the draw.

On the net liability, you will pay capital gains tax to His Majesty’s Revenue and Customs (HMRC) at 24 per cent. It could be a more modest 18 per cent if your income would be liable only to basic income tax under UK rules.

Importantly, you have just 60 days from the date the sale closes to submit a non-resident CGT return to HMRC and pay any tax due. Otherwise they start fining you.

So that’s the UK, but you are also liable to capital gains tax here. And as this was not your home, it will be assessed on the different between the valuation on acquisition and the sale price, minus direct costs involved in both ends of that deal.

Based on our example above, that will be €86,000. Your exemption down here is just €1,270, leaving a net gain of €84,730 which is taxable at 33 per cent — a bill of €27,961.

You are being taxed at a higher rate in the Republic and on the whole gain, not just the increase in value since April 2015, so the Irish bill in this case will inevitably be higher than your liability to the UK government.

But because Ireland has a double taxation agreement with the UK covering capital gains, any tax paid in the UK will be deducted from your Irish tax liability and you will pay the Irish Revenue Commissioners only the reduced net amount once you make the correct tax returns.

If, for any reason, the tax paid in the UK exceeded the Irish bill, you would just get credit here for the Irish amount owing. No refund will be available on the balance.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice

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