My husband and I finally got mortgage approval this month after a few years of refusals due to our low joint income, my health issues and our ages.
We have been renting a property from my mother for 10 years (however she did not declare the rent).
The mortgage we have is not enough to buy a property unless we up and move to a much more rural area which we cannot do – with my health I need to be near my Dublin hospitals. Our only option now is to look into buying the property we have been renting from my mother.
She bought the property in 2011 for €100k but it is now valued probably around €220k. I am hoping she will agree to sell to us for €150k. We have a deposit of €30k.
I was hoping you could explain to me what this would mean as I am aware that it would not be as straight forward as that.
Ms O.W., email
You’re in a very awkward position for a variety of reasons but that doesn’t mean that the banks are going to cut corners, as you have discovered. Nor will the Revenue Commissioners turn a blind eye.
And you should also know that your mum is also in an awkward position already.
There are a couple of issues here. Let’s start with the position in which you and your partner will find yourselves. The first thing you will need to do is get a market valuation on the home you’re renting from your mother. It is impossible to have a realistic conversation with her unless both sides know what the actual figures are.
For the purposes of this answer, I will take the values you have given on trust.
I can understand the difficulties in securing a mortgage. Given your significant health issues, which I don’t think the rest of the world needs to know about, and your partner’s age, I’m somewhat surprised you have got approval at all and even more surprised that it happened in the middle of this pandemic when banks are being even more cautious.
And I would caution that approval doesn’t necessarily stop the bank putting obstacles in the way on attempted drawdown.
The big tax issue for you is that if your mother sells you the house at a price below the market value, the difference – between, say, the €150,000 and the €220,000 market value – would be seen as a gift.
And while you can receive lifetime gifts/inheritances from parents of up to €335,000, the amount your husband can receive is a much lower €16,250. If the property is sold to you in both your names, Revenue would consider half the “gift” to have been made to your husband.
Tax bill
On the figures you have given, the “gift” would be €70,000. Of that, your husband’s share would be €35,000 – or more than twice the amount he can receive in his lifetime from anyone other than a parent, a grandparent, a sibling or an uncle or aunt. Essentially, in tax terms, he is seen as a “stranger” to your mother, coming under the lowest (Category C) inheritance tax exemption grouping.
So, even assuming he has never previously received an inheritance or a large gift (over €3,000) from a "stranger", he would face a capital acquisitions tax (inheritance/gift tax) bill of €6,187.50 on the €18,750 amount over his tax exempt threshold.
That mightn't seem a lot to some people, but you say you have limited household income, alongside potentially significant health bills. As you are already pushing yourselves to maximise your potential mortgage to meet the €150,000 purchase price, it is worth making sure the figures are doable for you.
The way around this would be for the house to be sold by your mother to you in your name only – not including your husband’s name. That would avoid the issue of your husband getting a tax bill.
However, I would be shocked if the bank allowed it. Given that you have already had to jump through hoops to get the loan approval, the bank will want to ensure that it has good security on the mortgage and that means having the property in both your names. And without the mortgage, the conversation is academic.
Mother’s liability
Now let's turn to your mother's position. Frankly, there are already tax issues looming for your mother. First and foremost, she has been receiving rental income on the property for a decade and has not declared it. If Revenue tracks her down, she is facing a significant income tax bill on that alone.
Second, from what you say, you are not paying rent to your mother to stay in her home but in another property she owns. That makes it an investment property.
While your mother would be exempt from paying capital gains on the sale of her own home, she will be liable to capital gains tax at 33 per cent on the difference between the price she paid for what Revenue sees as an "investment property" – even if it is never rented outside the family – and the "market value" of it when she sells it.
Note that is market value, not the actual price she sells it to you for. So if it is worth €220,000 and she bought it at €110,000, she is facing a tax bill for more that €35,000 on the €110,000 gain, not €13,000-odd on the €40,000 cash-in-hand gain she would have if she sold it to you for €150,000.
Yes, there are expenses associated with buying and selling the property that could cut that bill, but only slightly, so I’ll gloss over them here.
And while she might be hoodwinking Revenue on the tax due on rental income – something that may well come back to bite her – there is no way Revenue will not notice the sale of the property. Indeed, I would be surprised if the sale did not pique their interest into what had happened the property over the past 10 years. Their suspicion – not unreasonably – would be that the property had been rented.
If they approached your mother on that, lying might well only make her position worse should Revenue pursue it.
The alternative is that she gifts the property to you. As the property is less than the current tax free limit on gifts and inheritances from a parent to a child – €335,000 – you would not have any tax bill to pay.
But, again, your mother would face a capital gains tax bill on the difference between the value of the property now and when she bought it.
Now, if all sides are happy with the current arrangement, you could wait to inherit it when she dies. That would avoid any capital gains tax bill for her or on her estate as capital gains die with the owner. But it could be a long time to wait.
Options
I’m conscious that you and your husband are very keen to buy a home but I suspect the arrangement you are considering will not work even if your mother was open to the idea – largely because of the very large tax bill that she might face.
Indeed, the ongoing rental position could come to a crashing halt any time Revenue starts looking at this property. At best, she would need to hike the rent to cover the tax issue.
I’m reluctant to dash your hopes as you clearly have enough on your plate. I’m aware you need to be near Dublin hospitals for your various health conditions but there are some options.
You say you'd need to move to a much more rural area to find a home in your €150,000 price bracket. I'm not sure that's the case. Where you are now is certainly part of the greater Dublin commuting area but it is at the more expensive end of it. You could look at living somewhere like Edenderry, or similar towns in Offaly or even Laois with commutes that are not much longer, especially during weekdays, and where property is on the market well within your budget.
A lot to consider then.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into
