Tax relief available for transfer of site to child

An exemption from Capital Gains Tax (CGT) is available where a parent gifts (or sells) a site to a child. In the absence of relief, normal CGT rules apply. There are various conditions that must be met to avail of the relief, keep the relief and avoid a clawback of the relief. 

Gifting or selling a site to a child in the absence of relief

In the absence of such relief, a gift or sale of a site from a parent to a child will be deemed to have been sold to the child for market value and CGT could be payable by the parents. This is in line with normal gifting rules where the “market value” rules are imposed.  

It is important to note that generally speaking, where a loss occurs on the transfer of an asset to a child the loss can only be carried forward and used against any gain arising on a subsequent transfer of another asset by the same parent to the same child.

The relief

An exemption from CGT is available in respect of a transfer of a site by a parent or his or her civil partner to a “child” and that child’s spouse or civil partner.

The term “child” includes an individual who has lived with, was under the care of and was maintained at the expense of the person making the transfer throughout a period of 5 years or periods which together comprise 5 years before attaining the age of 18.

The purpose of the transfer must be to enable the child to build a house on the land in which they will live as their only or main residence.

If the relief is being claimed, the claim must be submitted with the parent’s Income Tax return if they are filing an Income Tax return, or alternatively a Capital Gains Tax return (Form CG1) should be submitted to claim the relief. Both returns are due for filing by 31 October in the tax year following the tax year in which the transfer took place.

Conditions

The following conditions must be met to claim this exemption. The land being disposed of must:

• Have a market value of €500,000 or less.
• Have an area for the house to be constructed.
• Have an area that makes up the garden or grounds of the house that does not exceed 0.4047 hectares (1 acre).

Clawback of the tax

There is a possibility of a clawback where a child at any time sells or gifts the land or part of the land to someone other than their spouse or civil partner. This applies where the child transfers the land and:

• Did not build a house on that land.
• Did not live in the house they built as their only or main residence for at least 3 years.

The gain which would have arisen when the site was transferred to the child shall be treated as arising to the child at the time of the subsequent transfer and they will have to pay the relevant CGT that their parents would have had to pay as well as any CGT that might arise on this transfer.

Gift tax for the child

Although there is an exemption from CGT for the parent, gift tax could arise for the child. A child currently has a tax-free threshold of €335,000 that they can receive from their parents. This is a lifetime limit where all previous gifts/ inheritances from parents are aggregated from 5 December 1991.

Any benefit over the threshold is taxed at 33%. Therefore, if the value of the site is below the threshold there could be no CGT or gift tax arising.

The child receiving the land may also have an obligation in relation to Stamp Duty and should seek detailed advice from their solicitor.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars private client team below:

June 2022