Gifting a life interest is sometimes done to ensure a person has:

• a residence during their lifetime
  or
• a source of income e.g. rent

Two points to keep in mind:

1) A life interest can be in any asset e.g. shares, house, land

2) Revenue regard an exclusive right of residence in a house as the creation of a  “limited interest” 

Rights for a shorter term e.g. 10 years, are treated similarly

Tax Advice

It is important to get tax advice before proceeding. There are complex and expensive tax consequences. If the parties are not aware of them, they may not deal with liabilities and be in default.

The creation of interest has implications for:

• Capital Acquisitions Tax
• Capital Gains Tax
• Stamp Duty

Gift to the life tenant

Example

Mr Murphy bought a house for €300,00 in 2015.

It is now valued at €500,000

In 2019 he gives an exclusive right of residence for life to his sister Aoife.

Aoife was then aged 60.

CGT for Mr Murphy

Mr Murphy has made a gift of the property into a “settlement” i.e. the life tenancy.

For CGT purposes Aoife is a trustee of the property.

Mr Murphy is deemed to have disposed of the entire property at market value.


CAT for Aoife.

Aoife takes a gift at

• market value of the property
• adjusted by the Revenue factor.

She is entitled to

• Small Gift Exemption €3,000
• Group threshold €32,500
• Credit for the CGT paid by Mr Murphy

In 2022 Aoife moves to Spain to live with another relative and rents out the property.

In 2024 Mr Murphy is offered €800,000 for the property.

Aoife agrees to give up her right of residence for a payment of €100,000.

Tax treatment

Aoife gives up the right

This element is difficult for taxpayers to understand. There are two aspects:

1).Deemed capital gain on the property

2).Payment to give up the right

Deemed gain

The property is deemed to have been sold at market value by the trustee. This is the life tenant, Aoife.

The base cost is the market value when it entered the settlement €500,000

Aoife gets Principal Private Residence Relief for her period of occupancy 3 years, plus last year deemed occupancy, total 4 years.

Payment to give up

This is exempt from CGT. No tax is payable.

The deemed gain has dealt with the CGT on the property.

Mr. Murphy’s sale of the property

Mr Murphy’s base cost for the sale of the property will be €800,000 i.e. the market value on the property leaving the settlement. There will be no gain for tax purposes.

Stamp duty

The transfer of a beneficial interest in property is liable to duty based on the market value.

Payment to relinquish the interest would be chargeable to Stamp Duty as the disposal of a beneficial interest in the property.

Conclusion

We had a case recently similar to this scenario, the tax implications were not dealt with upon the creation of the Life Interest.

This led to a disclosure complete with penalties and interest.