I bought a property to help a struggling parent a few years ago, but when that didn’t work out, I allowed a nephew to live there rent-free while he saved to buy a house.
Now Revenue wants to know what I do with it. I’m just a PAYE worker who has always met my tax obligations, but I had no idea this arrangement would get me in trouble. Any advice please?
Ms. BC, email
So much for the good Samaritans. Your loved ones have clearly been lucky enough to run into someone with a big heart, but it could get them in trouble, if not you.
It’s always frustrating for people when contacted by the Revenue Commissioners, even more so for people like you who are PAYE taxpayers and therefore have little or no direct contact with the tax authorities. The automatic assumption is that you must have done something wrong.
Not necessarily. What Revenue hates is the details. With local property tax records, they will know you have your home. If you are paying local property tax for this other property, as I assume you are, given what you say about tax compliance, then it is easy for them to determine that you have two properties. And of course they would have other documents relating to you, such as second house stamp duty payments, etc.
The obvious problem from a tax point of view is that you can’t live in two houses. And also, they will assume that no logical person will have bought a property just to leave it abandoned.
Of course, this is not unheard of. After all, a significant number of people own a vacation property as well as their own family home. And there’s nothing wrong with that. But that wouldn’t necessarily prevent Revenue from checking to confirm.
But if that property is close to your own home or somewhere that’s definitely off the beaten path, the suspicion they might have is that you’re renting it out and not filing income tax. Their other concern, especially now that the issue is relatively large, could be that you are using the property for short vacation rentals through platforms such as Airbnb.
I suspect that’s the purpose of the investigation. But, from what I understand, you don’t have any income because you don’t charge any, so you don’t have to worry about tax.
However, the same cannot necessarily be said for your loved one and, more recently, your nephew. There are increasingly strict rules for adults to obtain tax-free financial support from their family. Essentially, they are expected to fend for themselves as long as they are over 18 – or 25 if pursuing full-time education until that age. The only real exception is when they are “permanently unable by reason of physical or mental infirmity” to support themselves.
By allowing your nephew – and before him, your other relative – to stay rent-free in this second home, you are effectively offering him the market rent for the property each month.
That doesn’t necessarily mean he has a looming tax bill, but it could.
From now on, nothing prevents you from offering this young man €3,000 under the exemption from small gifts, but this is only once a year. That aside, what he would have to pay in market rent for the property is compared to his lifetime Capital Acquisitions Tax (CAT) threshold. CAT is also called inheritance tax or gift tax.
As a nephew, he falls under category B with regard to the gifts and/or inheritances you make. And the threshold for category B is €32,500. This is a lifetime limit for him from you and any other “linear parent” other than his parents. This would therefore include gifts or inheritances from any other aunt or uncle, grandparent or sibling.
Assuming he hasn’t received anything from either of these, he can only stay rent-free in your property until the rent he would have paid exceeds €32,500 plus the amount covered by any small gift waiver.
You don’t say where in the state this is, but for example a one bed house in Tipperary would cost between €700 and €850 judging from daft.ie, and a two bed house around €1000 .
On that basis, if it was a one-bed house in that part of the state, it could stay there for four or five years tax-free. Until Dublin, or Cork or Galway, the window would be smaller because rents are higher.
Once the outstanding market rent he would have to pay exceeds €32,500 (plus anything he could be deemed to have received from you under the small gifts exemption), he would accrue a tax liability to the State for 33% of any additional rental contract. This should be declared and paid annually with an IT38 form.
Indeed, before the tax is even due, he has to notify the taxman when his “donation” exceeds 80% of the threshold – or €26,000 in this case – probably just so they can track it.
The bottom line here is that you need to let Revenue know that you own this house but are not getting any rent from it. They will necessarily want to know why, when you would have to let them know that your nephew is staying there.
And from his point of view, it could be a good deal. He may pay taxes on a future inheritance, but because he’s saving to buy a house, now is the time when financial assistance can be most beneficial.
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