My husband and I live in a four-bedroom house with a large garden. Meanwhile, our son and his family live in a smaller house and with a growing family and need more space. Would it be possible for us to swap our house for his? We cannot afford for this arrangement to cost money. Can you advise if this is possible and what legal and tax implications would be involved?
The tax consequences of a proposed “swap” of two properties gives rise to a potential liability to capital gains tax (CGT), gift tax (CAT) and stamp duty.
Capital gains tax
A gift/swap is treated as a disposal of the house at its market value. CGT must be considered in the context of both houses. A gain may arise if the house has increased in value from the time it was purchased with CGT at 33 per cent. However, principal private residence (PPR) relief can relieve the CGT where the house has been used as the person PPR. Potentially both homes would qualify for PPR relief, such that no liability to CGT would arise for either party.
Gift tax (CAT):
When a person receives a gift or inheritance, they may be liable to CAT at a rate of 33 per cent on the value they receive. A son or daughter can receive lifetime benefits to the value of €335,000 from parents free of CAT. Therefore, in this case the son can receive a benefit from his parents in his lifetime up to a maximum value of €335,000 before CAT arises.
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A person is deemed to take a gift, where a person becomes “beneficially entitled in possession” to any benefit other than for full consideration in money or money’s worth paid by such person. Legal advice should be taken on the contractual arrangements given that the consideration (price) that the son pays for his parents’ house is his own house, which we assume will have a lower value.
The CAT benefit is the difference between the value of the house that the parents are giving the son and the house that he is giving you in return. If the son has not previously received any gifts from parents, there would be a CAT liability for him on receipt of the house if the benefit is greater than €335,000. See an illustrative example below.
Parents’ house market value: €900,000
Son’s house market value: (€500,000) Given as consideration
Difference in value: €400,000
Less son’s Group A threshold: (€335,000)
Taxable amount: €65,000
CAT at 33 per cent: €21,450
The “swap” would be more complicated if the son’s current house is in joint names with a spouse or partner, and if the house swapped is also going into joint names. The lifetime CAT threshold between non-blood relatives is only €16,250.
Using the earlier example but assuming the son’s house is in joint names and that the swapped house will go into joint names, the CAT will increase to €60,638. See example below.
Parents’ house market value: €450,000
Son house market value: (€250,000) – Given as consideration
Difference in value: €200,000
Less son’s Group A threshold: (€335,000)
Remaining tax-free threshold: €135,000
No CAT
Parents’ house market value: €450,0000
Son and partner’s house market value: (€250,000) – Given as consideration
Difference in value: €200,000
Less partner’s Group C threshold: (€16,250)
Taxable amount: €183,750
CAT at 33 per cent: €60,638
Note the annual small gift exemption of €3,000 can reduce the benefit slightly.
Stamp duty
Stamp duty arises on property transfers. Stamp duty also applies in cases where one property is exchanged for another. For stamp duty, a property exchange is seen as two separate transfers, A to B and B to A. Therefore, two separate liabilities to stamp duty arise, however, the stamp duty paid on the lesser-valued property can be taken as a credit against the higher liability.
Therefore, per our example above and applying a stamp duty rate of 1 per cent to both properties, the son as recipient of the higher-value house would be entitled to a credit against his liability for the stamp duty paid by the parents on the lesser value house. This is set out in the example below.
Property deed A to B: consideration rate of €900,000 at 1 per cent = €9,000 duty payable
Property deed B to A: consideration rate of €500,000* at 1 per cent = €5,000 duty payable
Net stamp duty payable: €4,000
Suzanne O’Neill is a tax partner at RSM Ireland
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